Saturday, April 13, 2013

Deposits are not investments when banks aren't required to provide transparency

In his Telegraph column, Liam Halligan succinctly makes the point that deposits are not investments.

Regular readers know this is particularly true when banks are not required to provide transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.

If depositors do not have the information needed to assess the risk of a bank and can reasonably rely on representations made the government (think passing a bank solvency stress test), they simply should never be included in a bail-in.

Investors in unsecured bank bonds or stock on the other hand are choosing to gamble on the solvency of the bank.  They are choosing to gamble because they are buying securities that are designed to place them at risk of losing their money.

The fact that investors in unsecured bank bonds or stock are blindly gambling because of the lack of transparency does not excuse them from the responsibility for losses on their investment exposures.

Rather, it suggests that these investors should instead practice the Wall Street Walk and find investments where there is transparency and they can assess the risk and value of the investment.

Yet as German Chancellor Angela Merkel quakes before her own increasingly outspoken electorate, with parliamentary opposition rising and federal elections looming in September, the screws are now being turned on Cyprus even more. 
How much can this Mediterranean mini-state take? Even before this latest cash demand, the Cypriot economy was officially forecast to shrink by an eye-watering 12pc over the next two years. 
Those with savings above €100,000 at the dominant Bank of Cyprus — including numerous local businesses, educational institutions and charities — are already in line to lose around two thirds of their deposits. 
With growth now likely to be even more negative, that horrendous asset-grab will be more draconian, with large savers at Laiki bank, the second biggest in Cyprus, likely to get nothing at all. 
At the risk of repeating myself, deposits are not investments. If you buy an equity or bond, exposing yourself to risk but also the prospect of a commercial return, then you stand to lose your money. Fair enough. 
If you put money in a bank, though, in a modern society that deposit should be guaranteed.  
To wilfully demonstrate otherwise is to incite deep social unrest, while undermining the very fabric of capitalism and wealth creation itself. 

No comments: