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Expat Investor : December 2008
FIRST PERSON Re-evaluating your savings expectations Simon Ripton, Joint Managing Director of Alliance & Leicester International, provides some essential insight on how expats can assess offshore savings rates. bank that a loan will go unpaid, the higher the rate of interest it will charge (supply and demand again). So if you are a saver, and therefore a lender to a bank, how did you measure the risk that you were taking on in lending your hard-earned cash? And if, as I suspect, you give little consideration to making your lending decision, how might you measure the risk you are taking when you next deposit savings in a bank? future. Many building societies also publish similar documents. Read these documents closely. If it is not immediately obvious who the bank’s customers are and what products the bank offers, then the likelihood is that the business model is complex and difficult to understand. In which case ask yourself, should you really lend your money to a third party without understanding how they might pay you back? So, as governments around the “...it is this simple relationship between supply and demand that means it will be some time before banks resume lending in the same volume, and at the same low rates, that we have grown used to in recent years. ” The first clue is the rate of Neither a lender nor a borrower be, or so the saying goes, and those of us who are fortunate enough not to require a mortgage or other loan to finance our lifestyle may be feeling somewhat smug after the credit fuelled boom of the last decade unravels with astounding pace. case study of woman who placed her precious jewels in her fireplace amongst the coals to hide them from thieves, only to set fire to them in a moment of forgetfulness! Far better to place our savings in a bank out of reach of thieves and away from harm. “Any bank worth its salt, as we have found out to our cost, should only lend money to borrowers who can afford to repay the debt.” Even those without debt might want to consider the nature of the relationship with their bank, in particular expat savers, who deposit their life savings in banks or building societies for safe-keeping. Depositing our offshore savings with a bank has obvious benefits, not least physical security. I recall, from my days as a student studying Banking and Insurance law, the 24 EXPAT INVESTOR ? When we deposit our savings with a bank for safe-keeping, whether we like it or not, we become lenders. And, in return for our lending, banks pay a rate of interest which reflects the value of money to the institution. Now, as anyone who has been observing the events of the last 12 months will know, the value of money to banks, especially retail savings December 2008 deposits, has soared due to inter- bank lending markets drying up, evidenced by increased Libor, the markets’ measure of the value of money. So, a simple case of supply and demand then. As the demand for personal savings deposits amongst banks increases, the price that banks are prepared to pay to personal savers (the lenders to the banks) rises, resulting in a bonanza for savers, with the returns available soaring above UK bank base rate. Indeed, as I type this commentary, it is possible for savers to secure a 12 month fixed rate of interest 3.00% higher than the UK bank base rate of just 3.00%. Any bank worth its salt, as we have found out to our cost, should only lend money to borrowers who can afford to repay the debt. This is why banks spend millions of pounds each year trying to assess risk and the likelihood that the loans that they make will be repaid. And the more risk there is to the expatinvestor.com interest on offer. If the interest rate looks very high, not just ‘Best Buy’ but significantly higher than the rest of the market, you might want to ask yourself why? If a bank is prepared to pay significantly more than the rest of the market this might imply that other sources of funds are closed. And if professional lenders are taking the view that the bank in question is not worth lending to perhaps you should also take a similar view. The second clue is financial strength, as evidenced by credit rating. A credit rating is a measure of the extent to which a bank will honour its debt, that is, your loan to it. There are a number of rating agencies around the world, the most relevant of which for UK banks are Moody’s, Standard & Poor’s and Fitch. The more As the rating agency awards a bank, the better. To find out about the credit rating of a bank visit the Investor Relations section of their website. Finally, Annual Reports and Accounts – publicly listed companies are obliged to publish reports and accounts so that shareholders can gain an insight into the underlying trading and financial performance of the company and how the company proposes to position itself for the world respond to the credit crisis with economic and fiscal stimuli, what next for savers? Well, despite the 2.00% reduction in UK bank base rate since October there are still some good deals to be had from well-rated savings banks with simple and straightforward business models. Since the reduction in UK base rate the interbank lending rate, Libor, has also fallen. However, it remains well above the historic norm against base rate, an indication that banks are still reluctant to lend to each other and continue to hoard deposits. Savings deposits from personal savers remain sought after, which in turn is likely to keep savings rates high. And it is this simple relationship between supply and demand that means it will be some time before banks resume lending in the same volume, and at the same low rates, that we have grown used to in recent years. So take advantage of the attractive savings rates available, but ensure that you act as a responsible lender and do your homework before you agree to lend your savings to just any old bank or building society. To find out more from ALIL, enquire through the fast facts number below. Fast Facts 10340
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