Inflation, banking crises and other risks can reduce purchasing power and bank savings. Here’s what all the risks are and how to avoid them.
The recent instability in the banking sector is raising concerns about the risks associated with keeping one’s savings in the bank. This issue affects all of us and can have a significant impact on your personal financial decisions.
The current financial crisis, which started in the US with the failure of Silicon Valley Bank and spread to Europe with the Credit Suisse crisis, has also fueled pessimism among fund managers. Right now, a systemic credit event is number one on the list of major dangers ahead, overtaking stubborn inflation , which erodes bank savings. S&P analysts say tighter lending conditions could unleash further turmoil in the credit market. According to a survey by BofA, the risk of credit crunch is becoming more worrying than inflation. It is therefore important to carefully consider savings and investment options and evaluate portfolio diversification to mitigate any risks.
Indeed, there are several factors that can affect the safety of your money in the bank, including the erosion of savings due to inflation, the risk of bank bail-in and the choice of product type financial institution to invest in.
The risks of keeping money in your bank account
Keeping your money in the bank in your checking account may seem like a safe and comfortable choice, but there are risks to consider.
One of the main risks is bank failure (bail in). If a bank fails, customer deposits over €100,000 could be at risk. In these cases, depositors may lose their money or it may take some time to recover it. However, we would like to remind you that on the basis of the EU legislation on bail in, all European Union countries are required to apply at least one deposit guarantee scheme at national level.
Also, another factor to consider is the low interest rate on checking accounts. This means that although the deposited money is safe, its value may decrease due to inflation. And in a phase of high inflation like the current one, this means that the money deposited in a current account loses value over time and does not generate enough interest to maintain purchasing power.
However, if you have a large amount of cash, you may need to diversify your investments or deposit your money in different banks to mitigate risk and maximize returns.
Should you invest or keep your money in the bank?
We’ve seen that keeping your money in the bank can offer greater security and liquidity, but a low yield on interest rates, especially in times of high inflation, could mean a loss of purchasing power over time. On the other hand, investing your own money may offer greater earning potential, but it also carries a greater risk of loss.
To mitigate risks, diversifying your investment portfolio is an effective option. For example, you may consider investing in stocks, bonds, mutual funds, and other financial instruments, so that you have a variety of investments and are not too exposed to a single market or industry or worse, bank failure.
In general, in the event of bank failure, the securities account is not directly involved in the liquidation procedure and the shares and bonds held within the securities dossier will be returned in full. However, if the securities in the portfolio include shares and bonds issued by the same bank, these could be at risk because they fall under the bail in procedure.
The bail-in is an internal bank rescue mechanism which provides that investors in riskier financial instruments bear any losses or conversion into shares in the event of bank difficulty.
This mechanism follows a logical hierarchy which provides that shareholders and holders of similar securities, such as convertible bonds or savings shares are first called upon to contribute .
These investors could see the value of their securities reduced or eliminated. This means they could suffer significant losses and should be aware of the risks associated with their investments. For this reason, diversifying your investment portfolio can help mitigate risk and maximize long-term returns.
Only if the resources in this category run out do we move on to the next category, i.e. the holders of subordinated bonds. Should this not be sufficient, the holders of ordinary bonds issued by the bank itself could also be called upon to contribute.
It is important to note that the bail-in regulation applies to all financial instruments described, even those purchased before 2016. This means that holders of such instruments should be aware of the risks associated with their investments and carefully evaluate their investment choices.
Finally, in the event of bank failure, the participation of customers who hold deposits for the part exceeding 100,000 euros, could also be required in order to cover the losses necessary for the continuity of the bank’s essential functions. We remind you that in any case the guarantee on deposits of up to 100,000 euros for each deposit holder is always valid and guarantees the return of the money deposited.
Original article published on Money.it Italy 2023-03-23 14:20:13. Original title: Quali rischi per chi tiene i soldi in banca?
