Across financial markets, the bad news seems to show no sign of abating. Increased volatility across currency markets, further downward pressure on major stock indices, and continued house price declines continue to consume headlines.
This continued run of bad news has me thinking of another topic I would like to comment on, which is ready access to cash.
Whilst we currently have a fully functioning banking system providing great service and ready access to cash, taking a glass half full approach, you may consider there are scenarios where access is not a certainty.
It is for this reason that, outside of cash held on deposit with several banks, I also hold a small amount of cash in its physical form. This small allocation is to simply ensure I have ready access to cash to support my family should the need arise.
Some of you may think this is a rather negative view of the robustness of our financial system, and that may be the case. However, I would counter that whilst unlikely, there is a risk that access to cash could be restricted. And if that risk can be mitigated through some simple and low-cost actions, why would you not mitigate it?
To provide reasoning behind this physical allocation, you only need to look at some recent history (and distant history if you wish) where depositors were not given ready access to their cash. This was primarily due to significant stress on the financial system, which we hope is rare. One recent example is Cyprus.
Cyprus is potentially the most relevant example that comes to mind where in 2013 during the Eurozone crisis, the Cyprus banking system encountered significant challenges related to bad loans, poor governance, and poor regulation. The solve for this crisis was to tax deposits held with banks at 6.75% for those under $130,000.00, and 9.9% for those over $130,000.00. Depositors were then compensated with an equivalent amount of the bank’s shares. It should be noted that Cyprus had deposit insurance of up to $100,000.00, however this tax did not account for the insurance [1]. This tax was combined with a government bailout to shore up bank balance sheets.
Whilst this action in Cyprus may seem a relatively smooth process, it does not quite show the concern and panic that led up to this decision, nor some of the challenges post the decision being made. An example of this is where only a limited amount of cash could be drawn each day which lasted for around a year [2]. For some, this would no doubt have been a period of stress, and increased concern in an already challenging economic environment.
I write the post not with any foresight into what may or may not eventuate, and indeed this risk will certainly be different across jurisdictions. However, as with anything, we should consider all options, and seek to mitigate where necessary, and economic.
Given the relatively low cost holding physical cash (essentially storage and opportunity cost of lost interest along with reduced purchasing power owing to high inflation), I decided to hold physical cash to ensure I can sleep a little easier at night.
[1] Inside Story – The cost of saving Cyprus – YouTube
[2] Cyprus scraps maximum daily cash withdrawal limits | Business | Economy and finance news from a German perspective | DW | 28.03.2014
mindthemoney 