When Even Cash Carries Risk

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You don’t need me to tell you that markets are in turmoil.

Overnight, US markets fell 2,014 points, the worst one-day points fall on record. Aussie markets will take their lead from that today, no doubt.

Investors are heading for the safety of cash.

Is this the right move?

Well, it’s not one completely without risk either.

Let me explain…

Whose cash is it anyway?

If true, this news is pretty disturbing…

Aussie crypto personality, Alex Saunders, suggested this week that banks are demanding more information when a customer wants to make a withdrawal.

To provide things like invoices to get access to their cash.

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He tweeted:

Reports Australian banks are now requiring customers provide invoices explaining what the money is being used for when withdrawing cash OR transferring funds electronically. Money in a bank, is not your money.

When asked to confirm his sources, he wrote:

These are reports & DMs I’ve received from separate people & businesses who were told this in branches when trying to withdraw cash this week. I’ve also reached out to friends that work in banks to verify this & see some official documentation. Will share any updates I get.

To be clear, this is anecdotal evidence. And we’ve not been able to confirm the truth of it either way.

But let me explain why I’m not ready to write it off as simply the overeager tweets of a cryptocurrency advocate.

You see, the banks have form in this.

History is chock-full of examples of banks holding onto customers’ cash against their will.

Ever since Swede Johan Palmstruch closed his bank in 1656, unable to refund his customers’ savings, the uneasy truth is that banks hold your money on trust.

More recently, the GFC of 2007/08 saw a string of high-profile bank runs.

Savers at the Bank of Cyprus lost nearly 47.5% of their funds.

And Icelandic online banks froze millions of UK customers’ savings accounts over that time too as their banking industry collapsed. The UK government eventually bailed out its citizens to the cost of 374 million pounds.

Then this, just last week…

The third largest bank in India — Yes Bank — has put a limit on customer withdrawals to $680 per month. It’s trying to recapitalise after a series of big loan defaults put pressure on their finances.

These are of course outlier events. They’re not the norm. But it’s worthwhile remembering they can happen.

Happily, though, most of the time banks work as they’re meant to.

It’s only when extreme, edge-of-the-bell-curve events hit, that you’ve generally got to worry about the safety of money in the bank.

Those unlikely ‘once in a lifetime’ events that seem to crop up once every decade or so.

Like now…?

It’s time to start thinking

I want to get several points clear before I continue this discussion with you today. I’m not scaremongering here.

That’s certainly not my intention.

What I do want you to do is to get thinking about these things in advance of whatever is coming our way in these turbulent economic times.

The lessons of history demand it.

But don’t panic. Money in the bank is about as safe as it gets from a capital preservation point of view.

For good reason…

Firstly, money in the bank in Australia is guaranteed by the Australian government for up to $250,000 per institution.

Secondly, as long as the government stands behind a bank, the value of your savings cannot, by definition, fall.

Governments can create money at will, so they’ll always be able to print out your dollars no matter what.

Of course, there’s the real value to think about too. That’s the amount of goods and services $100 will buy you a year from now.

Or inflation as it’s called.

Ask any Zimbabwean about how much that matters…

But the fact is, cash holds its nominal value better than any other asset. No arguments on that.

That’s not to say cash is ‘risk-free’ though.

Consider this from the RateCity website:

Why depositing money in Australia is not 100% safe

Even though depositing your money with an Australian lender is extremely safe, no financial investment can ever offer total certainty.

For starters, the Financial Claims Scheme only covers up to $250,000. So if you had $400,000 deposited with a lender, and that lender collapsed, you could lose $150,000.

There is an obvious way around this risk – deposit, say, $200,000 with one lender and $200,000 with another. That way, both deposits are covered by the government guarantee.

However, there is another risk: the government can abolish the Financial Claims Scheme whenever it likes. There is nothing to stop the government abolishing the guarantee tomorrow or in the next Budget or even during a future crisis.

The deposit guarantee was established in 2008 during the Global Financial Crisis, when overseas bank collapses made people fear for the security of Australian lenders. This guarantee is most relevant during a time of crisis – but it is also at such moments that governments are at their weakest economically.

So although it is extremely unlikely, it is possible the government might abolish the guarantee if it was ever placed under severe economic pressure.

Some points to consider at least…


The reason I bring this topic up today is because of the coronavirus crisis and the economic contagion it’s bringing with it.

Whether you think this virus is overblown or not, it’s certainly having real-life effects.

Markets have shaken violently over the past few weeks. Economic growth is shuddering to a halt. And investors are in the grip of fear.

We’ve seen most assets fall in value as investors move their funds to the seeming safety of cash.

That’s why I wanted to point out the risks involved in doing that too.

That’s our job here at Money Morning. To point out both the extreme opportunities and extreme risks that financial markets can dish up.

Because these rare events are often where the most money is made and lost.

We think this is a ‘stop press’ moment, a real black swan event. And we want to give you the kind of insights you won’t get anywhere else.

That’s why, for the next few days you’re going to hear from our senior editorial team. People who have seen all this before.

Editorial director Greg Canavan, Daily Reckoning Australia editor Shae Russell, and former publisher Dan Denning will be writing to you starting from tomorrow, to explain what’s really happening in financial markets right now.

I’d strongly advise you to read what they have to say before you make any big decisions.

Good investing,

Ryan Dinse,
Editor, Money Morning

PS: Our publication Money Morning is a fantastic place to start on your investment journey. We talk about the big trends driving the most innovative stocks on the ASX. Learn all about it here.

About Ryan Dinse

Ryan Dinse is an Editor at Money Morning.

He has worked in finance and investing for the past two decades as a financial planner, senior credit analyst, equity trader and fintech entrepreneur.

With an academic background in economics, he believes that the key to making good investments is investing appropriately…

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