OUR PERSONAL FINANCIAL ADVICE BEGINS WITH ONE QUESTION: WHAT MATTERS TO YOU? juliusbaer.com Bank Julius Baer & Co. Ltd., Lefebvre Court, Lefebvre Street, St Peter Port, Guernsey GY1 4BS, T +44 (0)1481 726618 Bank Julius Baer & Co. Ltd., Guernsey Branch is licensed in Guernsey to provide banking and investment services and is regulated by the Guernsey Financial Services Commission. 84 <strong>En</strong> <strong>Voyage</strong> | Aurigny’s Magazine
Business UK RING FENCING – HOW SAFE IS YOUR CASH? BY CRAIG ALLEN, HEAD OF INVESTMENT MANAGEMENT, JULIUS BAER GUERNSEY TEN YEARS LATER Ten years have now passed since the start of the Financial Crisis in September 2008. Most readers will remember where they were on the Monday morning of 15 September 2008, reading the news of the failure of Lehmans and the subsequent rescue packages of certain wellknown UK, US and European banks. The banking industry is now undeniably in a far stronger position, with new regulations resulting in increased capital requirements, depositor protection schemes and stringent stress testing. These regulations have all been positive developments for the consumer, though the most recent changes in the UK are particularly worthy of note. UK RING FENCING The UK regulator has now imposed a ‘ring fencing’ on all major banks with offices in the UK. Ring fencing generally involves splitting the banks into two, protecting UK retail consumers and moving them into a ‘ring-fenced’ position away from the higher risk activities of the bank. These higher risk areas can include institutional business, investment banking and commercial lending. This means that in the event of a default, the need for a bail out from the UK government is reduced and UK taxpayers are far less likely to have to pay for any bank failures in the future. The new rules come into force on 1 January 2019, though some banks have already implemented the changes. A UK-based retail client still benefits from the Financial Services Compensation Scheme which protects depositors up to the value of £85,000. For amounts in excess of this, the clients rely on the strength of their bank in the event of a major financial downturn. The credit ratings provided by independent agencies provide a good indication of a bank’s financial strength. Interestingly, ring fencing has therefore resulted in certain banks now having two credit ratings: one for the UK ring-fenced bank and one for the international operations. This is particularly relevant REGARDLESS OF THE CHANGES DUE TO UK RING FENCING, MOST BANKS APPEAR TO BE IN A FAR STRONGER POSITION TODAY THAN THEY WERE 10 YEARS AGO. to readers based in the Channel Islands as Guernsey and Jerseybased depositors have typically been grouped with the riskier activities of investment banking and commercial lending, away from the UK depositors. SPLIT RATINGS Looking at one high street bank as an example, the UK-based entity where all UK-based retail clients have their accounts has a Moody’s Long Term Deposit rating of A1. To put this into perspective, this is two notches below the credit rating of the UK Government. Interestingly, their Guernsey and Jersey-based clients are now exposed to the international bank which is rated at A2, another notch lower. Time will tell whether these new ratings move up or down, but the important message for Guernsey and Jersey-based investors with larger cash deposits is to check the credit rating of their banks and to check any current or future impact of UK ring fencing. SUMMARY Regardless of the changes due to UK Ring Fencing, most banks appear to be in a far stronger position today than they were 10 years ago. Clients with cash deposits in Guernsey are covered by the Guernsey Banking Deposit Compensation scheme for amounts up to £50,000. For larger sums, they have the option of investing into the bond markets as this moves any risk away from their bank’s balance sheet. However, given the experiences of Lehman, Landsbanki, HBOS, Northern Rock and other financial institutions in 2008, it is definitely worth checking a bank’s credit rating and financial strength before opening an account. At Julius Baer, we focus solely on private banking and investment management with no exposure to the higher risk areas of the banking industry. This is one reason why Julius Baer did not require any government or taxpayer assistance in 2008. Further, as a branch, clients banking in Guernsey are exposed to the credit rating and financial strength of the Swiss Parent company, which is currently rated Aa2, one of the highest ratings in the industry and three or four notches higher than many UK banks. 85
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