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Are Bank Deposits Really Safe? Print E-mail

Many people think that Banks are very STRONG. Putting money in bank is "safest". Please note that in the event of a bank collapse, your Bank deposits in SINGAPORE is only protected up to S$20,000 per bank.

What it means is that if you have S$20,000 in a bank, 100% protection. If you have S$200,000 in a bank, it's 10% protection and If you have S$2 million in a bank, it is 1% protection.

On the other hand, the Cash value of Traded Endowment Policies enjoys 90% protection under UK Financial Services Compensation Scheme. Yup, even if you have S$2 million, S$1.8 million is protected.

You can find out more about Singapore Deposit Insurance Scheme from this website: http://www.sdic.org.sg/

I extract part of the information from their website below for everyone's easy reference:

Singapore consumers enjoy the benefits of a sound banking system. Banks and finance companies licensed in Singapore are supervised by the Monetary Authority of Singapore (MAS). It is MAS’ aim to ensure the stability of the banking system in Singapore and to require financial institutions to have sound risk management systems and adequate internal controls.

However, MAS does not guarantee the soundness of individual financial institutions Therefore, a Deposit Insurance Scheme has been set up to protect the core savings of small depositors in Singapore in the event a full bank or finance company fails.

In the event a Scheme member bank or finance company fails, all of your eligible accounts with that member are aggregated and insured up to S$20,000, net of your liabilities to the member.

Moneys held in bank deposits under the CPF Investment Scheme are separately insured up to S$20,000.

Below is an article I found in the internet explaining "How Banks Create Money".

http://www.prosperityuk.com/prosperity/articles/howbcm.html

Prosperity, February 2002

The following is from mainstream economics textbook Success in Economics by Derek Lobley B.A. (London: John Murray Publishers Ltd, 1978 edition), which was part of the "Success Studybooks" series. It was intended to be "appropriate to the Economics syllabuses of many of the professional bodies such as ... the Institute of Bankers". It is published verbatim (but with emphases added) from ch.17, pp. 205-206.


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Let us imagine an economy in which there is only one bank. Soon after beginning business it finds that individuals and firms have placed £10,000 with it for safe-keeping. Its balance sheet (ignoring the shareholders' capital or property owned by the bank) would appear as follows:

Balance Sheet 1
Liabilities Assets
Customers' deposits £10,000 Cash in hand £10,000



The balance sheet is in effect a photograph of the bank's position at a particular point in time. The liabilities show the amounts that the bank may be called upon to provide to its customers and the assets show the cash and other resources available to the bank to meets its liabilities.

At this stage it is quite clear that the bank has sufficient cash in its till to meet any demands made by its customers.

In practice customers prefer to settle their debts with each other by cheque, ordering the bank to transfer money from one account to another. Thus if Adam and Brown have each deposited £500 at the bank, and Adam owes Brown £100, he can settle his debt by instructing the bank to reduce his account by £100 and to increase Brown's by the same amount. No cash changes hands; the bank still has obligations to its customers of £10,000; there has simply been a slight readjustment to those obligations.

If all the bank's depositors were always prepared to settle their debts in this way the bank could forget all about its holdings of cash. Customers will, however, need to draw a certain amount of cash from the bank each week to make small payments (it is not usual to write cheques for very small amounts) and to pay those people who prefer not to use the banking system.

If the bank discovers that, at the most, the weekly withdrawal of cash amounts to 10 per cent of total deposits, and that this is quickly re-deposited by traders accepting cash payments from customers, then the most cash the bank needs to meet demands from its customers with deposits of £10,000 is actually only £1000.

Alternatively we may take the view that with cash in hand of £10,000 the bank can afford liabilities of £100,000.

In this case let us imagine a customer, Mr Clark, who approaches the bank for a loan of £1000. The bank manager is agreeable and opens an account for him with a credit balance of £1000. Mr Clark can now write cheques to the value of £1000 although he has placed no money in the bank; he simply promises to repay the £1000 plus interest, having probably offered some security to the bank. The bank's balance sheet (2) now shows a different picture:

Balance Sheet 2
Liabilities Assets
Customers' deposits £11,000 Cash in hand £10,000
Total £11,000 Loans to Customers £1,000
(or promises to repay by customers)
Total £11,000

There is now insufficient cash to supply all the customers if they wished to withdraw their deposits, but the bank knows that the most that is likely to be withdrawn is £1100.

It will, therefore, be prepared to go on making loans (or creating credit, which is the same thing) until the cash that is held is equivalent to only 10 per cent of deposits (as per Balance Sheet 3):

Balance Sheet 3
Liabilities Assets
Customers' deposits £100,000 Cash in hand £10,000
Total £100,000 Loans to Customers £90,000
(or promises to repay by customers)
Total £100,000

So far as customers are concerned the standing of their account is the same whether they have actually deposited cash to open the account or whether it has been created by a loan. When they spend their money the recipient has no means of knowing whether or not they originally deposited cash.

Thus in creating credit the banks have added to the money supply.