When you invest globally, you quickly realise that banks are at the centre of the economy.

Some point to disruptive fintech stealing the bankers’ lunch. Sure, digital wallets, cards, and online-brokerage businesses are providing services that were previously the sole domain of banks.

But these services do not give you the chief advantage of a bank: Secure safekeeping for larger amounts of money, coupled with competitive lending.

Of course, a small number of banks at times have found themselves in trouble.

 

High interest accounts in Cyprus did not turn out to be the safe harbour expected when the sovereign debt crisis hit. Source: Wikimedia Commons

 

In 2013, the Bank of Cyprus found itself exposed to overleveraged property companies. It was not necessarily insolvent, just illiquid. A bailout had to be arranged. Depositors received shares in exchange for 37.5% of their savings above the European €100,000 depositor-protection scheme.

Traded shares on the Bank of Cyprus [FRA:318] today have not fared too badly. In the past five years, they are up over 170% and pay a dividend of over 6.8%.

The haircut does not look as bad in the end. But this tale reinforces the important nature of protection schemes and the risks of being exposed to overleveraging when interest rates change suddenly.

In this post, I want to look at a systemically important bank in Europe that has seen its stock price grow over 70% in the past year.

 

But, first, what happened to New Zealand’s depositor compensation scheme?

 

This is now set to launch in mid-2025. It will protect savers’ deposits up to $100,000 per customer. My understanding is a joint account with a husband and wife, for example, would see total coverage of $200,000 ($100,000 for each customer).

Such schemes have been in place in most of the developed world for years. They further reinforce the advantages of registered banks.

On the other hand, regulation in global banking is continuing to make access more difficult and encouraging consolidation across the industry. Our European banking story will provide an example of this.

 

Systemic banking

 

Since banks are at the heart of national economies but encompass the global movement of money, their regulation poses challenges and opportunities.

I learnt about this in a distressing case…

 

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