Is a bank safe? There is also a common belief among lenders that their capital is safe. In absence of a government or similar state authority providing such a guarantee, this can be far from case. At university one of cases we studied, was that of a particular savings bank. A rumour went around city that bank was in trouble. A great number of people went to bank to withdraw their savings. Those that represented first few % of total deposit had no problem. When percentage rose to 6%, which in this case was amount decided by “the owner of box”, rumour became fact in that there was no cash to pay out to depositors. As this was in a country in which owners of all boxes were members of a club, aim of which was to protect undeserved, but perceived, reputation of said members, members sent round security vans with sufficient cash to pay out all those who people who “had taken notice of an unfounded rumour.” Things quietened down after a while, and government decided to introduce legislation to create a minimum liquidity level.

Another case we studied was that of one of world’s largest banks, board of which was mainly composed of greedy souls. They had decided that stock market was a good place to keep liquidity margin, so that in event of a bear market, they could create more profit for shareholders. A sudden bear market wiped out liquidity margin, and bank came within a hair’s breadth of going belly up.

Once bank has reached a substantial size, liquidity should be sufficiently large to cater for all such panic withdrawals, unless of course panic is as great as 1929.

For borrower it provides a necessary service, and apart from penal conditions imposed on borrowers, is a vital service to our society. From investor’s point of view, it depends firstly on mentality of treasury function within bank, and secondly legislation that governs their actions and accountancy practices. From investor’s point of view, considering investing in stock of such an organisation, it depends entirely on an analysis of bank’s net worth and profitability. Both examples mentioned above have since gone from strength to strength, and have since been bought for more billions that most of us can count.

© Jenny Barclay

Jenny Barclay majored in math. and economics, and obtained a masters in viability of banking institutions. She is currently studying Spanish in Andalucia, Spain. This article may be reproduced on websites subject to credit being given to the author, and a link to her website.

Tip 4: First Pay With a Rewards Credit Card! If you're contemplating using your HELOC for a major purchase, you should consider whether or not merchant your dealing with accepts credit cards. Why? Because it makes a great deal of sense to pay first with a rewards credit card and then pay off card with your HELOC check. On a recent $14,000 bathroom remodel, I was able to charge plumbing services, cabinets, and almost everything else to my Fidelity/MBNA 529 College Rewards Mastercard. This card pays you back by putting 2% of everything charged into a 529 college savings plan. Result: $280.00 in college savings that would have been missed if I paid bills directly with home equity credit line checks! Whatever rewards credit card you favor, it's sensible to pay first with card whenever possible. Keep in mind, though, you must promptly pay off balance and not incur finance charges.

Tip 5: Replace Your 1st Mortgage with a HELOC! According to Money Magazine, if you have more equity than debt and plan to stay in your home for 3 years or less, you should consider replacing your first mortgage with a home equity line of credit. HELOCs are currently available around country at rates of 4% or lower. Even if rates increase a full percentage point each year, they'll still be low when you pay off loan. Best of all, there are no closing costs with most HELOCS so you won't have to worry about recouping them through interest savings as you do with a traditional mortgage refinance. A savvy person - using tip 3 in conjunction with tip 5 - might even move a portion of his mortgage to a 0% credit card thanks to flexibility of a home equity line of credit.