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The Comfort of Diversification

23rd Apr 2020

It is over a decade since I was asked by a client “is my money safe with my Bank?” However client behavior is changing and it’s the risk, not the return, that’s starting to focus minds.

As a consequence of tighter regulation following the 2008 financial crisis, the UK banking sector is now awash with capital, has a collectively stronger balance sheet than ever and has passed stress tests simulating severe global recession and other financial shocks. So should we read anything into the Prudential Regulation Authority’s demand that UK banks scrap plans to distribute £15bn or so in dividends? Or was this more about bank dividends and bonuses not feeling right when so many in the community are struggling due to current events?

The impact of Covid-19 on the economy is going to be far-reaching. Although the UK government appears committed to underwriting everything it can, consequential impact on the banking sector is inevitable. The only doubt is how deep the resultant recession will be and how long it will last. Rightly or wrongly, risk to capital is back on the table, and like 2008, clients want to know how to best spread their risk and achieve the comfort of diversification.

Opening a bank account for an offshore entity, possibly one forming part of a complex structure can be a lengthy process. Opening multiple bank accounts only magnifies this at a time when the banking sector, like many of us, is adapting to supporting its customers whilst many staff are home-working.

Money market funds provide one solution, although for many the simplicity of cash deposits is far more attractive, particularly at times of uncertainty. Fortunately, some of Jersey’s larger fiduciary services companies are experienced in providing treasury arrangements, which place client monies on deposit in pooled accounts held in the fiduciary’s name as trustee across a number of different banks.

This helps clients to easily achieve the desired level of diversification, avoid the need to open multiple bank accounts and have the security of knowing their deposits are ring-fenced from the fiduciary company’s own assets and liabilities. Long promoted by the Channel Islands Treasury Association, diversified treasury accounts provide a safer haven in which to ride out the current storm as well as offer longer-term stability.

Continuing the theme of managing risk, another trend I am seeing is a real throwback to a different era. Clients have become comfortable holding movable assets, such as bank deposits, in their country of residence, where often the rate of interest paid on hard currencies is favourable to that received offshore. Now that premium is less attractive, clients are once again looking to Jersey in its traditional role as a safe and secure jurisdiction when other parts of the world are potentially less stable.

At a time when clients have good reason to be worried on multiple fronts, the Jersey treasury community is well placed to help alleviate concerns regarding the safety of bank deposits.

If you would like to know more about JTC’s treasury capabilities and how we can help you, please contact David directly.

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