Saturday, October 29, 2011

Is it risky to put bulk of savings in small, foreign banks?

On a previous post which I talked about my favourite bank account (CIMB StarSaver), a reader commented it was too risky to put the bulk of my savings into a small, foreign bank. It is safer to put our money in a big, local bank.

It may well be true that the bigger, local banks are safer. However, bear in mind that the first SGD50k of your deposit in any bank is guaranteed by the Singapore government (Deposit Insurance Scheme). So, to reap maximum interest gain on your savings without compromising safety, you should put at least SGD50k into the highest interest-paying savings account which tends to be the smaller, perhaps riskier banks. In fact, if you want to play safe, spread out your savings across several bank accounts, each not exceeding SGD50k. This way, most or all of your savings is under the protection of the Singapore government.

Another advantage of owning several bank accounts is that you can shift your savings around to whichever account pays the most interest. Banks love fresh funds and they punish loyal customers by giving preferential treatment to fresh funds. It pays to be disloyal customers to the banks, so you should play the game by shifting your money around to whichever bank offers the highest interest. Now and then, banks will come out with promotions to attract new deposits. Just put your money there until the promotion ends. Capital is mobile. Take advantage of its mobility and move it around to wherever yields the highest income. The first SGD50k is insured by the government and therefore risk-free anyway.

I am not too worried about putting most of my savings in a small, foreign bank. All the banks in Singapore I know of are listed on a stock exchange. This is useful because the stock prices provide useful information on the safety of the banks. In 2008, one could tell which financial institution is the next in line to fall just by looking at their stock price (who is falling the most and the fastest?). It is so much easier than reading financial statements. Due to personal limitation, I find banks' financial statements unanalyzable (much subjected to management discretion) and prefer to rely on their market price as a proxy to their safety. Unlike fraudulent S-chips, banks do not suspend trading or go bankrupt overnight. There will be ample warning signs in their stock prices and news media before they go belly up. The moment the stock price drops more than 10% on consecutive days, pull out your savings and get the hell out! Do ensure that a chequebook is available for the account which holds most of your savings so that you can transfer your money out as quickly as possible.

Some will accuse me of being irresponsible by dishing out advice that will cause a systemic failure in the financial system during a panic. Regulators who discourage such panicky behaviour may well be advising the same thing to their closest relatives in 2008. Don't blame me. Blame the design of the banking system. This is a weakness in the fractional reserve banking system. Once confidence is lost, even the healthiest and most prudent bank will fail.

6 comments:

  1. I have another cash savings account under Maybank Isavvy. Interest is 0.1875% per annum for up to 5K.

    can we do a link exchange?
    http://personalfinancemaster-guru.blogspot.com/

    thanks!

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  2. I have Maybank Isavvy too. It used to be good until CIMB came along.

    Thanks.

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  3. Another tip to get maximum value out of depositors insurance. You should add more names to the account as joint account holders because the depositors insurance cap of $50k is based on per person per bank. So if you have two names on the account, the cap of the cover for the account is $100k (provided both the account holders have no other accounts at the bank)!

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  4. I cannot think of a worse possible decision than putting the bulk of your money in small foreign banks. Thats a terrible idea.

    ReplyDelete