How to find the best offshore banks for your business
It’s commonly accepted by the general population and most financial experts that putting your business revenue in a domestic bank is a safe and responsible thing to do. After all, if anything were to go wrong, your deposits are insured by the local government.
It’s commonly accepted by the general population and most financial experts that putting your business revenue in a domestic bank is a safe and responsible thing to do. After all, if anything were to go wrong, your deposits are insured by the local government. As a result, little thought goes into which banks should be entrusted with their company’s profit (or even personal savings). It’s a classic moral hazard, a situation in which a person is more likely be complacent because responsibility lies with the bank instead of the client. In the case of banking, that’s how a lot of people think, but it isn’t necessarily true that companies & individuals bear no costs of their banking decisions.
The safest thing to do is ignore the conventional wisdom and use facts to form your opinions. Choosing the right bank for your personal savings or business revenue makes a difference, and it deserves thought before making decisions.
A false sense of security
In the UK, Government-backed deposit insurance schemes can protect savers up to €250,000 and has a reserve of approximately €30 billion for this purpose.
Ultimately, €30 billion is a huge amount, however considering that investors currently hold around €9 trillion in UK deposits alone, the €30 billion in reserve amounts is relatively small considering. It’s actually less than half a penny for every dollar it supposedly insures. In fact, there are many banks in Europe that have deposits larger than the reserve and as Cyprus has seen it doesn’t take much to run into trouble.
Also, it’s already an established practice that whenever a government believes it necessary, deposit guarantees can be disregarded. We saw this in the early days of the financial crisis in Cyprus. The Cypriot government initially asked (but was ultimately refused) to take amounts in bank accounts under the guaranteed amount. Likewise, Spain has imposed blanket taxation on all bank deposits. These events show us that the confidence in the banking system, merely because of the existence of a government promise, may be misguided.
Fortunately, this day and age the decision on where to deposit your funds doesn’t have to be constrained by geography. Banking outside of your resident country, where much sounder governments, banking systems, and banks can be found, is considered to be commonplace and is relatively easy to do.
Obtaining a bank account outside of your home country is a key component of any business strategy.
It may protect a business from capital controls, lightning government seizures, bail-ins or other forms of confiscation. Offshore banks offer another benefit: they are usually much safer and more conservatively run than banks in your home country; at least if you run a business in the US and many parts of Europe.
But you shouldn’t just blindly move your business funds or personal savings to any offshore bank. One should consider only the best.
when analysing an offshore bank, it may help to consider:
- The economic fundamentals and political risks of the jurisdictions the bank operates in.
- The quality of the bank’s assets, namely its loan book and investments. This helps you determine what the bank is doing with your company’s funds. Look for banks that are conservatively run and don’t gamble with deposits. Banks that make leveraged bets with things like mortgage-backed securities or Greek government bonds it may be wise to avoid.
- Liquidity: sometimes a safer bank will keep more cash in store rather than investing it in assets or loan it out, all else equal. That way it can meet customer or business withdrawals without needing to potentially sell off assets at a loss, which may affect its ability to give you back your deposits.
- Capitalisation: this could be a financial indicator of the banks funds. It can also show if the bank is using leverage, which may increase the risk of insolvency. Occasionally a bank’s capitalisation is like its margin of error: the higher it is the safer the funds.
The best offshore banks?
Each year, a prominent financial magazine publishes a study on the world’s safest banks. Naturally, things can change quickly though. New options emerge, while others disappear. This is why it’s so important to have the most up-to-date and accurate information possible.
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