The savers’ lament

The savers’ lament

10 Sep 2013

Your savings have gone down the plug ’ole,

Your savings have gone the plug…

I am giving up on saving with the UK retail banks and building societies. I can potentially live with low interest rates if the service is competent and not annoying, but it appears that customers willing to be paid badly are losers who must expect to be treated badly. Last week a young man who was not born when I started working in the City told me that I would need to book a 30 minute appointment with him on a different day in order to be offered 1.7% on a two year fixed bond. In a rival establishment, another half hour appointment was required if I wanted to switch out of a savings account that pays 0.2%. In each case, the only convenient option was to close the account. This is fine with me, but why does it seem to be what the retail banks want?

Here are three reasons.

First, the bank rate is at a record low (0.5%) and the new Governor of the Bank of England is very keen to convince us that it is going to stay there. The experiences of the last few years have lowered savers’ expectations and have caused them, understandably, to be suspicious of those who offer surprisingly attractive interest rates. Why are they bidding for our money? Surely it must be safer to deposit our hard-earned with those who appear to be indifferent to it?

Secondly, the regulations introduced to protect us from unscrupulous financial advisers have caused many of the banks to withdraw from the advice business. Since 1 January, independent financial advisers have to charge a fee rather than take a commission out of what they sell you. If banks were ever pretending to offer independent advice, they cannot do so now. A person with financial flair and ambition would not stick it for long as a customer advisor in a retail bank reading out the small print and asking us to sign here and here. Consequently, nobody working in the local branch of your bank really gives a toss what you do with your savings.

Thirdly, another banking regulation designed to protect us is arguably costing us painfully. The Basel Committee is working on Basel 3. (At the time of the collapse of the banking system, Basel 1 and Basel 2 were the international rules in place to prevent the collapse of the banking system).

Basel 3 will introduce the Liquidity Coverage Ratio (LCR) on 1 January 2015.

“This standard aims to ensure that a bank maintains an adequate level of unencumbered, high-quality liquid assets that can be converted into cash to meet its liquidity needs for a 30 calendar day time horizon under a significantly severe liquidity stress scenario specified by supervisors. At a minimum, the stock of liquid assets should enable the bank to survive until Day 30 of the stress scenario, by which time it is assumed that appropriate corrective actions can be taken by management and/or supervisors, and/or the bank can be resolved in an orderly way. The standard requires that the value of the ratio be no lower than 100% (ie the stock of high-quality liquid assets should at least equal total net cash outflows).” 

Source: Bank for International Settlements

In order to discourage bank runs, each bank must hold liquid or near-liquid assets equal to thirty days of panic withdrawls. Investors’ deposits are of course liabilities from the banks’ point of view and it follows that the greater the sum of deposits, the more cash that must be held against them. Banks generally try to minimise their cash reserves because low yielding cash reduces profitability.

It does seem a strange outcome when one considers how banking is supposed to work according to the simple understanding of politicians. We lend our savings to the banks and they lend them on in turn to get the economy moving, right? That’s what banks do, right?

It may be that some banks don’t trust the economic recovery and see a lack of viable borrowers. It may be that some are still sitting on potential unrecognised losses and secretly feel the need to reduce their balance sheets further. It may be that they are reluctant to raise more capital as Basel 3 approaches.

All these points could contribute to their reluctance to accept our savings: but there is one detail in Basel 3 that really hurts us.

It goes back to the calculation of what proportion of a bank’s liabilities might be withdrawn by us during a 30 day panic. Basel 3 divides retail deposits into “stable” and “less stable”. It is assumed that total stable deposits might be withdrawn by 5%+ but that unstable deposits will suffer a 10%+ “run-off”. It follows that the banks potentially need to hold double the liquid assets for each unit of “less stable” compared to “stable”.

It used to be the case that so-called “demand” (instant access) deposits were clearly regarded as “unstable” but that so called “time” (fixed term) deposits were regarded as stable. Hence the tempting interest rates that building societies used to offer for fixed term bonds, with the rate getting more generous as the term grew.

Now the Basel Committee has taken a much harder line with the definitions. Only fixed term deposits where there are material penalties for early withdrawl will be regarded as “stable”. Moreover, if any depositor is ever allowed early withdrawl e.g. for reputational reasons, that entire class of deposits will be treated as “unstable”. Any fixed term bond that merely wipes out all accumulated interest if it is withdrawn early is not good enough: Basel 3 treats these as instant access accounts.

Consequently, the motivation to pay us more for tying up our savings has been obliterated. They don’t want our money.

This website is about investment and aims to give useable advice. The returns available from gilts are no longer completely laughable – the ten year yield touched 3% today. That’s doubled from July 2012. I am a cautious buyer of a gilt with the catchy name of UNITED KINGDOM 1 3/4% TREASURY GILT 22. This will be redeemed in nine years (7 September 2022) at 100 and currently trades at c.92. If you buy it at 92 today it will pay you 100 (capital gains tax- free), in 2022. That’s a gain of 8.7%. In addition it will pay annual income of 1.9% (=1.75/92). All in, this amounts to a redemption yield of c.2.75%.

This may not be a cause for joyous celebration, but it sure beats being told by a young man with a diploma in hair gel that your savings were moved into an account paying 0.2% while you weren’t paying attention.

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