From Saver To Investor
In Austria, bank deposits up to 100,000 euros are safe. This encompasses every person who puts money in the bank. This fact was confirmed on July 15, 2020, when Commerzialbank Mattersburg was closed. The day before, the Financial Market Authority prohibited the financial institution in Burgenland from doing business. Due to the deposit guarantee system, over 80% of customers were compensated just a few weeks later. The system works, is efficiently set up and was created precisely for such unforeseeable individual cases. However, what has been worrying the financial world in recent weeks goes far beyond this incident.
In the USA, deposit insurance was established in 1933. The Federal Deposit Insurance Corporation FDIC was intended to strengthen confidence in the U.S. financial system after the great stock market crash. This first-of-its-kind deposit protection in the amount of $2,500 accomplished that. For the first time in the 1980s, depositors were paid their financial claims due to bank failures. Today, the deposit protection in the U.S. is pegged at $250,000.
Global giants are not the problem
It is interesting to take a closer look at the U.S. banking landscape. Eight of the US credit institutions are defined as Global Systemically Important Banks. Among them are the well-known names such as JP Morgan, Bank of America or Goldman Sachs. These global giants are subject to higher requirements in terms of capitalization, liquidity and stress test scenarios. Yes, they even have to define living wills. After the great financial crisis of 2008, the aim here was to ensure that these institutions did not threaten the financial system. However, in the current crisis, the focus is not magnified on them at all, but mainly on the other medium-tier banks that come after the top 8. What do you estimate the number to be?
According to the FDIC, there are 4,695 institutions*. A surprisingly large number, but one that has been much higher. Twenty years ago, there were 9,354 FDIC-insured banks. Year for year, the number steadily decreased. Smaller institutions were bought out and the big banks became more significant. Total deposits at the end of 2022 stood at $10 trillion – that is 10,000 billion. As with any insurance, only a fraction of the potential risk is held in reserve. Specifically, it was $128 billion or 1.27% of insured bank deposits. In the stress year 2009, this figure even dipped into negative territory.
Special funds are not part of the insolvency estate
In Austria, the target funding for the deposit guarantee funds of the various guarantee institutions is regulated in the Deposit Guarantee and Investor Compensation Act (ESAEG) based on various EU regulations. Section 18 of the Act states that each deposit guarantee scheme has to set up a deposit guarantee fund consisting of available financial resources amounting to at least 0.8% of the total covered deposits of the member institutions (target level).
Thus, this statutory 0.8% is not far from the current 1.27% in the USA. For both parties, this insurance is not suitable for systemic risks. A bank run on the U.S. regional banks would overwhelm the system by far. Hence the decisive action by all official bodies.
Investors should invest everything that goes beyond short-term liquidity requirements in securities. This always depends on individual needs and personal risk appetite. Securities have the advantage that they are special funds (“Sondervermögen”) and therefore do not fall into the insolvency estate. In addition, the risk can be spread over many issuers. If you would like to know more about your individual options, we would be pleased to hear from you.
* 4,706 minus the top-8 and the three failed banks Silicon Valley Bank, Signature Bank, and Silvergate Bank. The FDIC publishes details here and here.
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