Increased Deposit Insurance Will Create Both New Investment Opportunities and Lessen Due Diligence regarding Banks and Brokers *

Reliance on deposit insurance will result in investors performing less due diligence on their own behalf and will at the same time encourage the entry of a broader range of risk-insured service providers. The traditional quality brand of banks and brokers will consequently become of reduced importance to investors.

In the future it is likely that financial service providers will need to purchase insurance coverage from government connected insurers and/or private sector commercial insurers. It is possible that some financial institutions will offer third-party issued insurance on the accounts of individual clients for an additional fee. Such increased asset protection could be profitable for the insurers and be appealing to some fiduciaries.

The cost of this insurance coverage will increase the cost of the services offered by the financial institutions and will have an impact on their clients’ investment return. Competitive pressure will result in financial institutions seeking customers as well as higher returns from their invested funds within the parameters of insurer stipulated limitations on their financial management.

Asset protection has a cost and customers of financial institutions will have to balance their priorities when making relationship decisions. Of course, banks and brokers could assure their clients that at no time would certain financial ratios ever be more or less than an agreed level. Then, all that would be needed to complete the marketing package would be an independent party to guarantee the institution’s compliance.

Change is coming and decisions relating to investing in and through financial institutions are likely to become more complex.

Arthur Lipper, Chairman arthurlipper@gmail.com
British Far East Holdings Ltd.