Since the Cyprus banking hit the headlines I have been getting enquiries from people concerned about the safety of their bank deposits.
Under an EU Directive, France’s Fonds de Garantie des Dépôt will refund bank depositors up to €100,000 should a bank fail. Savings above €100,000 the excess may be lost.
In Cyprus the situation is a little different. The initial plan to tax even accounts under €100,000 was thankfully rejected. However, deposits over €100,000 in the Cyprus’ two largest banks will suffer heavy losses, possibly 50% or even more!
The Cyprus disaster is a stark reminder that it is possible to lose money in the bank. So what can you do to protect your savings?
Remember that cash is not a ‘risk free’ asset. Besides the possibility of institutional failure, interest rates have been at historic lows for years and inflation has been eroding the value of bank deposits.
I would advise against keeping more than €100,000 in one banking group. Note that the compensation limit in the Channel Islands and Isle of Man is lower at £50,000, and they have a cap on the amount they will pay out.
It is important to diversify your capital over different assets. This reduces risk. You need to think of the cash as an investment asset in the same way as shares, bonds and property, and have suitable diversification to spread the risk.
Seek advice on alternative arrangements where you can “ring-fence” your assets from the institution holding them, so that if it fails, your money is protected.
Your investment decisions, whether to invest in shares, cash, or anything else, should be based on your personal objectives, circumstances, time horizon and risk tolerance.
