Banking crisis: Is my investment at the bank safe?

Dear reader,

Thank you for your question.

In an era marked by financial crises and economic uncertainties, the stability of banks has become a major concern for customers, shareholders, and regulators. In the past few months we have seen major collapses at large global banks such as Silicon Valley Bank and Credit Suisse, so your concern is justified.

To get into the specifics of your question, South Africa (for all its faults) has a world-renowned banking system characterised by strict regulatory reporting and strong balance sheets. First National Bank (FNB), being one of the country’s leading financial institutions, is no different and has built a strong foundation to prevent collapse and ensure the bank’s resilience in challenging times. Furthermore, the South African Reserve Bank (Sarb) has defined FNB as being a systemically important bank in South Africa. This means FNB is subjected to more rigorous oversight and regulation than your typical bank in SA.

That said, any investment with any financial institution does carry a degree of risk. In the years preceding the banking crisis of 2008, nobody would have thought a bank as big as Lehman Brothers would collapse, but it made huge investments way outside its own risk parameters and paid the price for this. The point here is that the ‘too big to fail’ argument holds no merit and even the largest and most well-capitalised balance sheets on earth hold a degree of risk in them.

However, in SA you are guaranteed protection for deposits at banks up to a certain amount.

In 2022, the Sarb passed a deposit insurance scheme whereby every bank in South Africa will have to provide R100 000 worth of insurance per depositor. This essentially ensures that, should a bank fail, depositors will get a fast payout of R100 000 without having to wait for the liquidation process.

Getting back to your question, while the risk of collapse at a bank like FNB at this point looks extremely slim, there are other reasons why investing your money in a cash savings account is perhaps not optimal.

Firstly, if we look at money market rates over the past decade, a R100 000 investment made 10 years ago would be worth around R175 000 today. If you had invested that same money in the S&P 500 index, your money would be worth R365 340. This goes to show that although the stable 6% (average) return on cash seems like a safe option, equities tend to outperform cash substantially over the long term.

Secondly, investing in cash can be extremely tax-inefficient – especially if you have invested a large sum. This is because the interest from a South African source earned by any natural person is exempt from tax up to an amount of R23 800 per annum. If interest earned exceeds this amount then you will pay tax on that interest according to your marginal tax rate.

Suppose you are a high earner in the 45% tax bracket, and you invest R2 million in a cash savings rate at current rates of 8.25%. This means you will earn R165 000 in interest. You will therefore pay R165 000 less the exclusion of R23 800 = R141 200 x 0.45 = R63 540 in tax. This means your real return on the R2 million invested is R101 460 which represents a sub-inflationary return of just over 5%.

I hope this has helped to answer your question. As always, I recommend you get in touch with a qualified financial advisor who can assist you with regard to liquidity, investment returns and efficient tax structuring.