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IF THERE IS one topic that I get asked questions on more than any other it is in the area of bank deposits, the Deposit Protection Guarantee Scheme (DGS) and Deposit Interest Rates. The first answer I always give is that we should worry about the areas we can control, and ignore things that we cannot control.
Reading and discussing economic and investment updates seems to have replaced past discussions on property values and everyone seems to have an opinion on the Bank Guarantee, Euro Stability, Yen Devaluation and German Government Bond Yield. In reality, the investment world is very simple, but investment managers, stockbrokers and economists make their living from selling fear, greed and excitement in equal doses!
To set the scene, there is over €150 billion on deposit in customer deposit accounts in Irish Banks as of February 2013. This figure has been steadily falling ever since the banking crisis began in the summer of 2008, but is still a significant figure.
At that time, the Irish Government introduced the Eligible Liabilities Guarantee (ELG) which covered all deposits and some bonds in Irish covered institutions, in their entirety. I won’t cover the merits or otherwise of this blanket guarantee, or whether they were forced into it by higher powers. However, the ELG did give Irish depositors some comfort that all of their hard earned savings were fully guaranteed by the Government, and at the end of the day, the European institutions.
This comfort was taken away at the end of March when the ELG expired and we reverted to the historic guarantee. This guarantees €100,000 per institution. Therefore any individual who has a deposit with a covered institution with a balance under €100,000 can take some amount of comfort in a government guarantee.
This does cause some confusion for individuals with multiple accounts, as the guarantee is per ‘institution’ not per account. For example, if an individual is lucky enough to have a savings deposit with AIB for €100,000, and also a portion of their pension on deposit with AIB for another €150,000, these accounts are taken in aggregate and only €100,000 of the combined balance (€250,000) is guaranteed)
Most sensible individuals are now rightly worried about the security of their cash and how to mitigate all the risks associated with savings and investments at the moment.
While I don’t personally believe the European Institutions or the Irish Government will default on their guarantee, recent news in Cyprus has, at least partially, brought this possibility into focus. It is clear that spreading deposits around the guaranteed banks and keeping exposure to any one bank below €100,000 is the obvious way to reduce this risk to a minimum
Since banks have had some success with recent bond issues and seem to be stabilising, deposit rates have fallen significantly. There were wide spread offers during the summer of 2012 for 5 Year Fixed Deposits earning over 5 per cent. The best rate on the market as of the time of writing is now 2.75 per cent (excluding specialist accounts with Danske Bank).
This return, after DIRT is deducted, will only just beat inflation and I see this as being a larger threat to people’s deposits over the long term than any short term default risk. However, inflation never gets the headlines and is an invidious threat which is hard to understand in the short term.
The only true way to protect you from risks is to be widely diversified across a whole range of asset classes. €150 billion on deposit in Ireland would indicate to me that we are over-invested in cash at the moment, just as we were over-invested in property and Irish Equities in 2007.
In the long run, well managed and well protected portfolios never have too much in any one asset class. I would recommend assistance from a professional (ideally from a Fee Based Financial Advisor) before deciding exactly how to invest in a widely diversified portfolio but it’s the only way to truly protect against all the threats to our wealth and wellbeing in the current economic environment.
My biggest fear for Irish Investors and any of those individuals sitting on large deposits is that as the interest rates keep falling, they will become more and more restless. Equity markets have been on a fairly steady bull run since the market bottom in March 2009. The US indices are at or above all-time highs and this strong short term past performance might tempt some of these depositors to finally leap back into the markets.
I don’t know what is going to happen, but I would be nervous about equity markets at their current valuations and can easily see a correction in the second half of 2013. As markets keep going up, the risks of this correction keep getting larger and I just hope Irish depositors don’t’ get caught out by the markets again.
In summary then, the only way to reduce risk is to diversify. At a minimum this diversification should be across all the guaranteed banks, and for funds with a long term focus, diversification into other asset classes is ideal.
David Quinn is the Managing Director of Investwise.ie. Established in 1988, Investwise is the trading name of Fitzpatrick Morris Financial Services Limited. With years of experience in the financial industry, they offer independent services and advice on a range of financial matters.
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Who, unless ur a banker or politician has that kind of money in the bank? Most of us live month by month at this stage me thinks.
You’d actually be surprised at how many people have substantial savings and yet have never received professional advice on them (paid or otherwise).
Or had the good sense not to buy 500 grand houses in Roscommon
Lucky we didnt do that then. Also didnt claim fron yhe state when jobs were lost but used savings to see us through until another job was found. My bad.
This is a very interesting article, while previous comments may criticise the article, I think they missed the point, it is not about protecting my €100k + investment, it’s about protecting whatever savings i have from inflation. Albeit, in a lot of cases it will be less than €100k. Thanks for sharing David, I’d love to hear more from you.
While I’m sure the article is well intentioned, it is notable that the author states that he can ‘see a correction [in the equity] markets in the second half of 2013′ whilst simultaneously he admits that he ‘does not know what is going to happen’.
Basically he is guessing, and ultimately your guess is as good as his.
I can see Mayo beating Galway later today, and if you invest €100 on the Mayo win you could return a €50 profit. But ultimately I don’t know what is going to happen.
How much will it cost me to promote my business on journal?
So this article is for people with over €100,000 in their account? Aw man, the comments on this are gonna be hilarious. What a ridiculous piece.
I’ll grab the popcorn Jim.
Some people have acquired sums like this over years of hard work and frugal spending – maybe not many and not many who regularly post on the journal. They’re entitled to advice on looking after their sum.
And maybe there should be more articles ‘promoting Irish businesses’. It’s a big multiple-faceted economy u and there’s space for lots of different types of business. If its not for you just move on.
Every weekend it’s someone new promoting their business. Nick Leeson’s one week, George Mordaunt more recently. A stellar cast. Love his line about “selling fear”. Like that’s not what he’s trying to do.
Good article. It is not just for people with large sums of money. The advice about inflation is probably the most important.
Imagine if the state could coax people to spend ( not tax) 1% of that money each year.
That would be a €1.5b spending boost to the economy. The state would reap €500m in indirect taxes.
The state could offer a stimulus of €500 grant / rebate to households to spend €2,500 on home improvements. It would have a number of benefits:
1. Stimulate white economy
2. Boost employment in construction related trades, services and retail
3. Self financing
This worked in the 1980′s. No doubt there is money out there waiting to be spent. But yhe state is over doing the fear game and people are afraid to spend because they don’t know what the next stealth tax will be.
Saving for a rainy day is the key. Recessions do not last for ever. The situation may appear difficult at the moment but the economy will improve.
In fairness the article makes some valid points. Most people would not be aware of the effect of inflation on their savings which combined with low interest rates and high tax can severely deplete the value of your hard earned cash.
If you are unsure about this you should ask at your bank, credit union or post office where this advice can be given to you free of charge. Of course it may be biased towards that particular institutions products but as an existing customer that may not be an issue for you.
The post office has by far the best deposit rate. Only last week the banks were lobbying to have them cut because they can’t compete with them.
I moved all of my money to the post office and i was trying to convince Dad they were the best now and he wouldn’t believe me!
Definitely the best Lucy and there’s plenty options too from saving bonds to prize bonds ( 0 interest but in with a chance of winning up to €1,000,000 and can cash them in anytime ) to solidarity bonds. I should get a job with the post office.
Prize bonds are not a good investment. You are likely to get more return From putting your money on deposit than from any winnings. I’m speaking from experience and from research. There’s some excellent info on askaboutmoney.ie on them.
€500 notes….tch!…Couldn’t they find any real money for the photo?
The article insufficiently addresses how unstable the current situation is and how fragile the Irish banks and indeed other banks are.
At one time, it was simply about matching the level of risk you were willing to accept against the potential for reward. Now , the emphasis is on return of capital, not return on capital. The CBI is petrified, rightly so, over the solvenctpy of the Irish banks. The first and sensible step is to stay well clear of deposits in Irish banks. Next , it is important to understand that government guarantees of deposits up to €100,000 are only as good as the capacity of the guarantor.
Look for AA rated banks upwards and spread between currencies.
The financial system is extremely unstable, property is uncertain, equities will decline again, much deposits in Pensions funds are totally unprotected, not covered by any guarantees and people are right to be apprehensive at the moment.
Just look at the recent quarterly returns to the Central Bank of Ireland by the pillar banks and it is evident that the mortgage default situation is still under reported. The solvency of the Irish banks is in doubt and the scale of the next bail out may be too great.
Ireland enjoys the distinction for such a small country in the EU of having the most extreme banking crisis. No one else came close to matching us. It was not sub prime or derivatives or complex CDOs which knackered the Irish Banks. It was grossly reckless over lending to developers and to home buyers. That recklessly irresponsible over lending was more than encouraged by the supposedly independent watchdog, the Central Bank of Ireland.
Stay clear of Ireland if you want any security.
Finally, we are at greater risk of deflation than inflation at the moment. Yes, in the longer term inflation my ravage the value of savings but the bigger concern at the moment is not losing your bank deposits or having a large chunk removed.
WOW a €500 note!!!
..I saw one of these on National Geographic once!
Although within the paragraph itself it correctly states that there is € 150 BILLION on deposit in Irish banks , the heading for that paragraph states that it is € 150 MILLION on deposit. I think that it is a tad important that bankers and financial advisers get little details like this correct. Holymudderagod is all I can say to that one !!
Thank for the heads up David!
Trust the Irish banks and the deposit government guarantee? No chance. Moved any savings off shore. Bank card sorts out any access issues.
Yes but are those savings now in an account with a foreign bank that gives you a good interest rate? You mentioned access with a card, which would suggest its a day to day or demand account.
Interest rate is not great but then again so much spare cash I do not have to worry about interest rate losses. But, at least I know it is safe and no longer in the Irish banks sphere of influence.
Closest I will get to seeing a €500 note for aong time. :’(
Not all people are complete wasters, spend thrifts, or bad investers,many have been very prudent all their lives and lived within their means and now have substantial sums saved,are mortgage free,and are in recept of healthy pensions,the 150 billion on deposit in banks dont surprise me at all.
I think if you have 100K in the bank you more than likely aren’t reading this article,
The entire money system is legalised fraud. There is nothing behind money. Of the <3% of money that is cash (the rest is just made up on records), iou cannot go into a central bank and exchange your €1,000 for gold – there is no gold, or other metal standard. Paper cash (paper standard) only has value because people think it has. No paper currency has ever survived throughout history.
The money system manipulates people into working for nothing, and giving up their perceived acquired wealth. they may realise this when an economic collapse occurs and they lose everything they were supposed to have earned and deserved.
Money deposited in a bank account is, as established under case law going back more than 200 years, legally the property of the bank, rather than the account holder.
Pfft, pieces of paper with pictures of bridges on them… why do we get so worked up over money?
Is a joint account covered up to €200,000?
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