Is money in the bank actually that safe? Did you know that banks play musical chairs with 1 chair and 12 players? They lend out approximately 12 times the amount of money that they have in shareholder investments. Banks play a vital part in our economy but it requires trust from all of us that the music will keep playing.
Most New Zealanders don’t realise that banks survive on a small buffer of shareholder capital. These shareholders have received and expect high returns on their investment. This, in part, has been achieved by increased leverage by the banks. The stability of any bank depends on the quality of the loan book but few people look at the details before depositing their money in the bank. There are many financial commentators that have argued that the Global Financial Crisis (GFC) was largely due to actions done of banks. Things such as banks lending too much and being too leveraged.
To avoid such disasters, in 2018, the Reserve Bank of NZ created a key bank metrics tool to monitor and report the level of risk that banks were exposed to. With this and other information, they publish 6 monthly Financial Stability reports.
It’s a complex topic but if you’d like to read more then check out this article about bank leverage by David Chaston: https://www.interest.co.nz/saving/bank-leverage
If you’d like help with your investments please contact us at Castle Trust Financial Planning.