As safe as a bank?

South Africans are jittery about financial serices following the Saambou and BOE crises, and the consumer needs to take responsibility when it comes to their personal finances. (Published previously: 2002/04/30)

July 9, 2003

Following on the 20Twenty/Saambou crisis many people doubt the sensibility of putting their money in banks. Suddenly, that old trunk under your bed seemed like a great idea as many are wondering how safe their money is exactly in the bank?

Since we were little kids, most of us were taught to save our money in a bank or similar institution.

I remember being practically forced to save money in the Post Office bank as a little kid in primary school. But we learned that this was the safe and sensible way to deal with money (never mind the fact that it created a huge apartheid slush fund for the NP government of the day!). But imagine the unimaginable...

This is exactly what happened to some 400 000 Saambou/20Twenty clients. Suddenly, one day, they just couldn't get their very own money which they had carefully saved, from the bank into which they themselves had paid it.

Most of these clients never thought for a moment that they were at any risk at all when they deposited their money.

Not only has this event impacted on the lives of Saambou/20Twenty clients, but all of us have become just a bit more concerned about putting out money in a bank. If it could happen to Saambou, one of the top ten banks in SA and a well-known, established bank, could it happen to any one of the banks?

It is very important to remember that though high financiers may argue that economics and finance is a science, devoid of any emotion, the Saambou collapse was one that was cause by exactly that - emotion.

People became afraid as a result of the drop in the share price of Saambou, which was brought on as a result of doubts as to the soundness of its' lending portfolio, and suddenly, there was a run on the bank. A run on a bank is when many customers suddenly attempt to withdraw all their money at the same time. A whopping R1 billion left the bank in about a day and a half.

If these withdrawals had not all come at the same time, the bank may have survived. Also, the South African Reserve Bank usually provides assistance to banks in this position, but for some reason, the bank decided not to do so in this particular case. However, South African banks in general are well-funded and have good credit ratings. Part of what contributed to the Saambou collapse was indeed a sudden downgrade in its credit rating.

With the fact that our major banks are well capitalised and have spread their risk over a wide portfolio, it is very unlikely that any of our major banks would come into a similar situation. Even if they did, the South African Reserve Bank would have almost no choice but to save such a bank.

This all seems like great news, but is there anything we can do to protect ourselves from the possibility of such disasters?

The same rule that applies to almost all financial decisions apply here also: spread your risk. Or as Granny used to say: don't put all your eggs in one basket.

How to spread the risk

Place your investments across a number of institutions - don't invest every cent you have in one bank alone, especially not if it is a small, new or unknown bank.

When a financial institution offers a product that seems to good to be true, it probably is - unrealistic returns are usually a short course to disaster!

Invest in different types of products - not only bank products like fixed term deposits; consider unit trusts, fixed-term investments with insurance companies and money market funds. All in all, our banking sector is in good shape. However, the smart investor will always spread risk and be creative and engaging with the manner in which their money is invested.

Many good returns! –Qfn

For a free personal assessment of your financial risk profile, your retirement plan or a general portfolio assessment, email us.
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