With the global economy shut down due to Covid 19, lots of people’s minds flashed back to the last recession and the worry that the money they held on deposit wasn’t secure. I have had one or two questions from clients on the security of Irish banks, so I thought it would be a good idea to address this.
During the Celtic Tiger there was too much concentration on one industry by the banks, the building industry. There was a lack of supervision by the Central Bank and the Irish banks borrowed excessively on the money markets to outdo each other.
When the credit crunch happened, banks around the world didn’t know who held bad debts so they stopped lending to each other and the money markets dried up. This meant no new loans and no more property deals. Property fell in value and so did the value of the assets underpinning these loans. It meant that the liabilities (deposits) of the bank were bigger than its assets and in effect, the banks were insolvent.
The Irish government had to step in and guarantee people’s deposits and the bondholders. They also recapitalised the banks, taking a shareholding in return.
We went from a country of six banks, AIB, Bank of Ireland, Permanent TSB, ESB, Anglo Irish Bank and Irish Nationwide to having three banks. Anglo and Irish Nationwide were liquidated and EBS became part of AIB.
When looking at the security of a bank, we need to look at its Tier 1 Capital. That is the difference between its assets and its liabilities. This is calculated by dividing its Tier 1 Capital by total risk based assets. Legislation called Basel III states that the minimum Tier 1 capital is 10.5%. How are the Irish banks doing?
If you are still not happy with the security of Irish banks, you can avail of State Savings. The money you place with them is guaranteed by the Irish State. There is a limit of €120,000 per product or €240,000 for a couple and the returns are free of DIRT. While the different bonds they have are for specific terms, you can access your money at any time and just get a lower rate for breaking the term.
They also have a deposit account which offers a variable rate that is subject to DIRT.
During the credit crunch, the ECB said that no bank will fail and they didn’t let any bank go to the wall. The crisis we have at the moment is not a monetary crisis, it is a health crisis. It is not the same as before.
If you have any questions, drop me an email to steven@bluewaterfp.ie