There’s that government guarantee in Europe that absolutely, positively, surely, pinky swear promises, cross your heart, and hope to break up the euro, that if your bank goes belly up your savings are safe up to 100 000 euros.
The fact is this: It has been clearly stated at the highest levels that deposits above 100 000 euros are fair game in a banking crisis.
We saw this with Cyprus, where it become apparent that in a serious crisis, it is not enough to wipe out the equity and bond holders of banks, the depositors need to take a hit too.
But rest easy. The Banker is here to help. There is one thing that if you are aware of it and act upon it, you can save your savings. First to understand what it is. I have to point out a few bits and bobs about the basics of banking.
When you deposit your money in a bank, the bank will pay you interest (interest rates are historically low at the moment) on your money.
Let’s pretend the bank offers you an interest rate of 0.75%. What it then does is deposit your money with the central bank who pays them interest. Let’s say the central bank pays your bank 1% in interest. You’ve given money to the bank, which pays you 0.75%, but the bank gets 1% for it. So now your bank is making 0.25% from your money.
It doesn’t end there. Your bank will now use your money, and deposit it with the central bank as collateral to borrow from the central bank. Since the central bank is charging 1% for the loan, your bank will add a margin to that when someone comes to ask for a mortgage. For example a margin of 1.5% would mean that the mortgage borrower is paying 2.5%. So the bank is making a profit of 1.5%. That profit is on money you have put for them to keep safe.
This is the basics of banking: Take money from depositors, pay them a lower rate and then lend the money out at a higher rate. Simple is it not?
So now for the bit about saving your savings. This is the rule:
Thou shalt know the market interest rate.
If your bank is offering above market interest for you to make a deposit with them, take your money and change banks. Leave now. (In Europe the market rate would be Euribor)
You may be wondering what kind of crazy advice is this. I am in effect telling you that when you get a better interest rate, that you should avoid it. I must be absolutely out of my banker’s head. Well I assure you I am not.
The thing is, when a bank offers you better than market rates, they are making a loss on that money.
You therefore need to ask:
Why is the bank making a loss to take my money?
Because they hope to use your money to make up for the loss elsewhere. The thing about this tactic is that it is often the last resort in a very bad situation.
Banks lend to and from each other, it’s easy, they pick up the phone or send an email. That’s all they need to do. So why would they go to the trouble of doing a marketing campaign, trying to get people to sign up as new customers and transfer money in, when the end result is a money loser for them? All this takes time and costs even more money.
The reason is simple: They are often in trouble. They are being charged much more by other banks or they aren’t getting funding from other banks, so to keep the merry-go round going, they turn to you. They offer you big interest rates to entice you. (And time and time again you fall for it)
So remember. Always keep this simple rule in mind:
When they offer too much, take your money and run.