Fears about the security of the banking sector had receded, but the recent news about Banco Espirito Santo brought back memories of the uncertainty we have experienced a few times over recent years.
Fears about the security of the banking sector had receded, but the recent news about Banco Espirito Santo brought back memories of the uncertainty we have experienced a few times over recent years.
Banco Espirito Santo (BES) is Portugal’s second biggest bank. Worries about the strength of the bank hit the markets when the Espirito Santo Financial Group, which owns 25% of BES, suspended its own shares and bonds because of “material difficulties” at its ultimate holding company, Espirito Santo International. It had missed a payment on short-term debt.
On Thursday 10th July the Lisbon stockmarket regulators suspended trading in BES shares for a day after they fell by 17%.
The bank issued statements to reassure markets that its solvency was not at risk, saying that it has enough capital to meet any potential capital shortfalls resulting from its exposure to Espirito Santo Group. At as at the end of June, it had a buffer of €2.1 billion above the regulatory minimum.
At the time, the Bank of Portugal released a statement to stress that there was no reason to doubt the bank. Prime Minister Pedro Passos Coelho also sought to allay fears, saying: “There is no reason for the state to intervene in a bank which has solid capital and which has a comfortable margin to deal with any eventuality, even the most adverse.”
The central bank issued another statement on Sunday 13th July, when it ordered BES’s advisory board to immediately appoint its new, independent, chief executive and board members, something which was planned for the end of the month.
The Prime Minister also implied that the state would not support BES, saying that banks had to pay the price for making poor business decisions, and that “it should not be paid by society as a whole and much less by the taxpayer”.
There is a €6 billion fund for banks left over from Portugal’s bailout, but it would be subject to EU rules. This could mean that the private sector has to share some of the burden.
While there should not be any reason to fear a return to the banking crisis, this is a good time to remind readers that they should always understand what protection the financial institutions they use offer.
Under an EU Directive, all European countries have a guarantee scheme to refund bank depositors up to €100,000 should a bank fail – the Fundo de Garantia de Depósitos in Portugal. Savings above €100,000 may be lost, though you may receive additional funds following any distribution of assets as part of the insolvency process.
In the UK, the Financial Services Compensation Scheme (FSCS) limit is £85,000 (to match Europe’s €100,000).
Many expatriates have savings in Jersey, Guernsey or Isle of Man. Banks in these jurisdictions are not covered by the UK FSCS, even if they are divisions of UK banks. You would need to rely on the local guarantee scheme, where the compensation limit is £50,000. They also have an overall “cap” on the amount they have to pay out. Jersey and Guernsey will aim to pay compensation within three months, while the Isle of Man has no time limit.
For peace of mind, it is advisable to keep bank deposits per banking group below the compensation limit in that jurisdiction.
The only certain way for investors to achieve security from institutional failure is through a state controlled investor protection regime. Luxembourg stands out among EU states with its strong culture of investor protection. It has a regime that provides maximum security to investors without limit.
To protect your capital, you also need to consider the risk/return relationship with any asset, whether it is shares, property or cash in the bank. You could be exposed to more risk than is justified by the return potential of the asset. With interest rates so low, depending on the amount of money you have in the bank and your circumstances and objectives, there may be better places for your money.
It has always also been very important to diversify your investable capital over different assets. This reduces risk. You need to think of cash as an investment asset in the same way as shares, bonds and property, and have suitable diversification to spread the risk.
As always, your investment decisions should be based on your personal objectives, circumstances, time horizon and risk tolerance. Speak to an experienced wealth manager to get tailored advice, on the best asset allocation for you and as well as on asset protection.
14th July 2014
All advice received from Blevins Franks is personalised and provided in writing; this article should not be construed as providing any investment advice. All information is based on Blevins Franks’ understanding of legislation, in the UK and overseas, at the time of writing; this may change in the future.
