Deposits at Bank of Ireland are soon to face charges in the form of negative interest rates after it emerged on Friday that the bank is set to become the first Irish bank to charge corporate customers for placing their cash on deposit with the bank.
BOI recently failed the EU stress tests and is seen as one of the most vulnerable banks in the EU – along with Banca Monte dei Paschi di Siena (MPS), AIB and Ulster Bank’s parent RBS. All the banks clients, retail, SME and corporates are unsecured creditors of the bank and exposed to the new bail-in regime.
The news came days after it emerged that FBD, one of Ireland’s largest insurance companies, have been moving cash out of Irish bank deposits and into bonds. Fiona Muldoon, the FBD CEO cited extremely low returns on deposits and bail-ins as the reason they are withdrawing cash from Irish banks and diversifying into corporate and sovereign bonds.
The monetary policies being pursued by the ECB and other central banks is making deposits, banks and the banking system vulnerable. Central bank policies are contributing to individuals and companies withdrawing deposits from banks which is making already fragile banks even more fragile.
It is important to note that while there are “deposit guarantees” in place in most jurisdictions in the EU, these guarantees are only as good as the solvency of the nation providing them. Many nations in the EU remain insolvent or at least border insolvent. Thus, the deposit guarantee level of €100,000 in many EU states and $75,000 in the UK is likely to be arbitrarily reduced to lower levels in the event of deposit “haircuts” in the next banking and financial crisis.
Prudent retail, SME and corporate clients are realising the increasing risks facing their deposits. They can no longer afford to simply leave their deposits in a single bank account or indeed even in a few bank accounts. Diversification into other assets, including an allocation to physical gold, is becoming an important way to hedge the risks posed by negative interest rates and bail-ins.