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The financial crisis of 2008 irrevocably changed our trust in financial institutions. While some of that trust has returned, a whole generation has seen first-hand that the global economy is fallible. We still deposit our paychecks in a bank account and buy shares in big investment firms, but that trust is not blind anymore, and it can turn on a dime. So how solid is financial trust now and what can you do if you’ve lost faith in the system?

In banks we trust?

A YouGov survey charting attitudes towards the banking industry since 2019 shows that views wax and wane frequently depending on many factors, including age, politics, and social grade (middle or working class).

This fluidity is understandable. We are only 15 years on from the Global Financial Crisis which tore apart the reputation of the financial system, and the memory of collapsed banks, millions lost in life savings, job losses and government bailouts is still relatively fresh. Today any minor or major incident (poor customer experience, negative media, falling share price, bank failure) can quickly erode confidence and lower expectations.

While moods can change quickly, to a large extent trust has been restored. Internationally, governments have been at the centre of monumental efforts to make the system safer.  For example in the UK, regulation around capital requirements (which is the easily accessible assets that banks need to hold in case you want your money back) has been tightened substantially. This means if there is a sudden surge in demand for withdrawals, the banks should be able to honour them.

They also have to be more careful with their leverage ratio, which is how much debt banks are using to finance their activities. The higher the debt (leverage), the higher the risk – and crises happen when there are no checks on how much risk banks are taking.

The stress tests that the UK and many governments now have in place to gauge how much pressure a bank can come under before it will collapse, are intended to provide some comfort to depositors and investors. But if that’s true then why did three high-profile regional banks collapse in the US earlier in 2023? And how did Credit Suisse, one of Switzerland’s largest banks, effectively collapse before being bought by rival UBS in March for a fraction of its market value?

These bank crises have led to uneasy feelings of déjà vu for many who lived through the 2008 crash. Any bottleneck or perceived blockage in the flow of cash between interconnected banks can cause panic and a run on the banks. Governments are determined to avoid the same Northern Rock-style queues and mass panic that was a poster child for the Global Financial Crisis. So, in March, central banks across the world carried out a coordinated action to calm nerves by boosting the flow of US dollars into the global financial system.

Stock markets may have been placated, but the YouGov poll showed a rise in unfavourable attitudes to banking between January and August this year (from 32% to 36%). And that figure is actually flattered by the more positive attitude of young adults. Excluding the youngest age category, around 40% of all over 25s feel fairly or very unfavourable towards the banking industry. For 18-24 year olds, the generation who were still children in 2008, that figure is less than half (19%).

What should we fear?

The ‘financial system’ or the ‘banking industry’ covers a very wide range of businesses and transactions – from cash deposits in a bank to buying shares in that bank, to investment products from that bank or other financial companies. All these interactions come with counterparty risk, the risk that the other party in the transaction (the bank holding your cash, or the bank whose shares you bought, or the bank who sold you an investment product) might fail and you will lose your money.

Counterparty risk is then interlaced with systemic risk too. The ‘system’ itself is a network of interconnectedness that often makes it hard to see where the risk is. The Global Financial Crisis was caused by a web of risky finance products, packaged and repackaged until the risks were almost completely obscured. By then it wasn’t clear who was the accountable counterparty, and when the system collapsed, everyone lost.

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It’s in the interests of global governments and central banks that the system doesn’t collapse. To assuage the risk for consumers, the UK government guarantees bank deposits up to £85,000, but there are no safety nets beyond that. In the US that figure is $250,000. In the case of shares or other investments, the safeguards will depend on the type of investment and the terms of the agreement. Risky investments tend to come with fewer safeguards (share or bondholders may be near the back of the queue to be compensated if an institution fails).

So ultimately the choice and the risk must be weighed by the investor. How likely is my bank to fail? Will there be another financial crisis on the scale of 2008? How far will the government go to protect the system and individual investors? For the 60% of people who are either favourable or neutral towards the banking industry, those risks may seem small, but for the almost 40% who do not have such a positive view of the banking industry, there is an alternative.

The gold alternative

For many people who don’t want to take on the inherent risk of the banking industry, physical gold is a way to step outside of the financial system. Gold represents a safe-haven asset, especially in times of economic, social and political instability and has a proven track record of growth over the long term.

Because physical gold sits outside the banking system, you do not expose your savings to bank insecurities or counterparty risk. In addition, gold tends to increase in value during periods of uncertainty, for example, if the entire financial industry or economy comes under pressure (the gold price was volatile in the immediate aftermath of the Global Financial Crisis, but more than doubled in the three years from August 2008 as the world went through a painful recession).

Gold has tax advantages as well, and can be both VAT and capital gains tax-free depending on individual circumstances. Even if you do trust the financial system, holding some physical gold is a useful hedge against volatility and uncertainty. Because as we all found out 15 years ago, nothing is ever absolutely certain.

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