Consort1’s Justin Clapham explains why utilising the Secured Deposit Service, which allows cash deposits via the repo market, is better than placing cash with banks on an unsecured basis.
In recent years the stability of the financial sector has come under intense scrutiny following several global events that have put the solvency and liquidity of banks into question. One such notable incident is the situation faced by Credit Suisse, which highlighted the potential liquidity and contagion risks associated with a bank failure.
This instance serves as a stark reminder for local authorities on the importance of safeguarding their cash deposits. One effective method is to utilise the Secured Deposit Service, which allows cash deposits via the repo market. Here’s why this method is vastly superior to placing cash with banks on an unsecured basis.
1. Enhanced protection for capital
A primary advantage of using the Secured Deposit Service is the enhanced capital protection it offers. When local authorities opt for a secured deposit, they can elect to have the assurance that their capital is backed by UK gilts or other securities as collateral. This collateral serves as protection that, even in the unlikely event of a bank failure, the deposited money remains safe. On the contrary, with unsecured cash deposits, such security is absent, exposing the depositors to undue risks.
One of the crucial benefits that local authorities must consider is that secured deposits are not subjected to the UK Bail-In. In simple terms, this means that in the event of a crisis, the bank cannot utilise your deposit in order to rescue itself. This provides an additional layer of assurance to the depositors, knowing that their funds won’t be arbitrarily compromised to salvage a bank.
2. Attractive returns
Not only do secured deposits offer greater safety, they also offer potentially higher returns compared to their unsecured counterparts. Local authorities, when placing cash deposits with banks backed by collateral, can often secure a better interest rate. This contrasts with depositing the same amount with the UK government, which often fetches a lower rate. Secured deposits can also offer the flexibility of longer durations, allowing for better financial planning and growth.
3. Preference by banks
Banks themselves display a marked preference for cash deposits placed on a secured basis. This inclination is primarily due to the liquidity and balance sheet benefits they derive from secured deposits. When a bank has a cash deposit underpinned by collateral, it is not subject to the liquidity restrictions of unsecured deposits. Banks also use secured deposits to balance assets verses liabilities. This can see additional interest rates spikes during curtain periods.
4. Reduced barriers to direct access
Local authorities might wonder why they should not access the secured deposits via the repo market directly. The truth is, doing so comes with a series of challenges. For cash lenders, there are significant operational requirements to navigate. They must also grapple with intricate legal agreements and the indispensable need for a custodian. Banks, on their end, face hurdles like onboarding costs, protracted legal negotiations, and a compromised position in the event of their failure.
In contrast, when local authorities use the Secured Deposit Service provided by Consort1, they bypass these complexities. They benefit from the advantages of secured deposits without wading through the operational and legal maze.
Conclusion
In the ever-evolving financial landscape, where uncertainties are the only constant, local authorities must adopt strategies that ensure both the growth and safety of their deposits. With the potential risks brought to light by situations like Credit Suisse or the more recent SVB, it is clear that secured deposits via the repo market are the way forward. Not only do they offer the potential for better returns, but they also ensure that the capital remains shielded from the vagaries of the financial world.
For local authorities, the choice is clear: opt for secured deposits and enjoy peace of mind, coupled with attractive interest rate potential.
For more details: please visit www.consort1.com, email: trading@consort1.com, call 0208 142 8888, address: 35-36 New Street, St Helier, Jersey, JE2 3RA.
Consort1 is the registered business name of Consort 1 Limited, which is regulated by the Jersey Financial Services Commission.
