Ground-breaking -

Secured Deposit Service via the repo market: a safer bet for cash deposits

In recent years, the stability of the financial sector has come under intense scrutiny, following several global events that have put the solvency and liquidity of banks into question. One such notable incident is the situation faced by Credit Suisse in early 2023, which highlighted the potential liquidity and contagion risks associated with a bank failure. This instance serves as a stark reminder for cash holders on the importance of safeguarding their cash deposits. One effective method is to utilise the Secured Deposit Service, which allows cash deposits to be secured via the wholesale repurchase agreement (repo) market. Here's why this method is vastly superior to placing cash with banks on an unsecured basis:

1. Enhanced Protection for Capital

A primary advantage of using the Secured Deposit Service is the enhanced capital protection it offers. When cash depositors opt for a secured deposit, they can elect to have the assurance that their capital is backed by UK Gilts or other securities as collateral. This collateral serves as second level of protection so, even in the unlikely event of a bank failure, the deposited money is protected. On the contrary, with unsecured cash deposits, such security is absent, exposing the depositors to undue risks.

One of the crucial benefits that cash holders must consider is that secured deposits are not subjected to the UK Bail-In. In simple terms, this means that in the event of a crisis, the bank cannot utilise the deposit in order to rescue itself. This provides an additional layer of assurance to the depositors, knowing that their funds won't be arbitrarily compromised to salvage a bank.

2. Attractive Returns

Not only do secured deposits offer greater safety, but also potentially higher returns. Cash holders, when placing cash deposits with banks backed by collateral, can often secure a better interest rate. This contrasts with depositing the same amount with the same bank on an unsecured basis or by purchasing government bonds directly, which often return lower rates, especially when the trading and custody costs are included. Secured deposits can also offer the flexibility of short or longer durations, allowing for better financial planning and growth.

While the absolute returns are competitive vs unsecured cash deposits, due to the significant risk reduction secured deposits provide, the risk adjusted returns are extraordinary.

3. Preference by Banks

Banks themselves can display a marked preference for cash deposits placed on a secured basis. This inclination is primarily due to the liquidity and balance sheet benefits they derive from secured deposits. When a bank has a cash deposit underpinned by collateral, it is not subject to the liquidity restrictions of unsecured deposits. Banks also use secured deposits to balance assets and liabilities. This can create additional interest rates spikes during certain periods.

4. Reduced Barriers to Direct Access

Cash holders might wonder why they should not access the secured deposits via the repo market directly. The truth is, doing so comes with a series of challenges. For cash lenders, there are significant operational requirements to navigate. They must also grapple with intricate legal agreements and the indispensable need for a custodian. Banks, on their end, face hurdles like onboarding costs, protracted legal negotiations, and a compromised position in the event of their failure.

In contrast, when cash holders use the Secured Deposit Service provided by Consort1, they bypass these complexities. They obtain the advantages of secured deposits without wading through the operational and legal maze.

Conclusion

In the ever-evolving financial landscape, where uncertainties are the only constant, cash holders must adopt strategies that ensure both the growth and safety of their deposits. With the potential risks brought to light by situations like Credit Suisse or the more recent SVB, it is clear that secured deposits via the repo market are the way forward. Not only do they offer the potential for better returns, but they also ensure that the capital remains shielded from the vagaries of the financial world. For cash holders, the choice is clear: opt for secured deposits and enjoy peace of mind, coupled with attractive interest rate potential.

The service is currently available for large corporates, local authorities, funds, insurers, pensions, asset managers, and any other holders of cash deposits of £10m or greater.