Tag Archives | bank deposits

How Safe Are Your Bank Deposits?

How Safe Are Your Bank Deposits?

Events in Europe have caused many investors to question the safety of their bank deposits due to fears of a global collapse of banking systems. In fact, the New Zealand banking system has continued to perform strongly despite the challenging international environment. There are 22 registered banks in New Zealand, of which around 16 offer retail banking services. All banks carry a credit rating, and one of the most important steps when investing in a bank is to find out what this is. The larger banks – ANZ, ASB, BNZ, Westpac, BankDirect, HSBC and RaboDirect all have credit ratings of AA-, which places them amongst the most highly rated banks in the world. At the other end of the spectrum, Co-operative Bank, Heartland Bank, Bank of Baroda and Bank of India have credit ratings of BBB-, the lowest investment grade.

Despite the strength of our banking system, failures can occur. Unlike many other countries, New Zealand does not have a deposit insurance scheme, which means that potentially depositors could lose all or part of their funds in the event of a failure. In June, 2013, the Reserve Bank is aiming to implement a policy called Open Bank Resolution (OBR). Under this policy, a statutory manager would be appointed to an insolvent bank. Deposits would be frozen overnight to allow the manager to assess the situation and the following day a portion would be unfrozen. Potentially, some of the frozen funds could be retained by the manager to cover the banks losses. The outcome is likely to be less disruptive than if the bank went into receivership or liquidation. While this new approach has caused some consternation with depositors, the reality is that, providing deposits are held with a bank with a high credit rating, the likelihood of losses is extremely low.

 

 

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Bank and Lose

Bank and Lose

Investors who retreated to bank deposits after the Global Financial Crisis now find themselves caught between a rock and a hard place. Do they stay in bank deposits for peace of mind but poor returns or do they venture back into investment markets? It is sensible to batten down the hatches when a storm blows over, but at some point, life has to return to normal. So how do you know when it is time to come out of your safe place?

People generally only change the way they do things to avoid an unpleasant situation or because they are attracted by something which is better. Over the last year, the consumer price index rose by 4.5%, thanks to GST and commodity price increases. Bank interest rates for 12 months are currently around 4.5%. However, after paying income tax of 17.5%, the net interest rate is around 3.7%. Invest $100,000 for a year at 3.7% after tax and at the end of the year, even after receiving interest, with 4.5% inflation your money will buy you the equivalent of only just over $99,000 worth of goods. This is not a pleasant situation! Rates, power, and petrol prices continue to rise and with low interest rates, bank investors will continue to lose wealth.

So what are the alternatives? In a nutshell, bonds, property and shares. That is not to say, however, that investors should move entirely out of bank deposits and invest elsewhere. Diversification is still the best investment strategy, but having at least a small part of a portfolio invested in shares will help protect against inflation. Over the last year, US, Australian and New Zealand share market indices have risen by around 13%, 14% and 7% respectively. These returns will surely entice bank investors out of their safe place.

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