This weekly note is written when Guernsey, Jersey, the UK and all other countries in the world are facing unprecedented challenges as a result of the Covid-19 pandemic. Stock markets have tumbled wiping billions off valuations and, as cash managers, we look to the fundamentals of safety and liquidity in times like this.

Looking back the cause of the 2007/2008 financial crisis was very different to the current crisis which is, in effect, a global health problem. Back then the crisis started in the US sub-prime mortgage market which then led to fears which spread through the global banking system leading to interbank liquidity freezing and subsequent banking failures and bail-outs. This time it is the other way around with Covid-19 having an immediate and mushrooming effect on businesses across the globe which will inevitably affect today’s banking system.

However, lessons learned from to 2007/2008 crisis have led to new rules requiring banks to hold far greater capital reserves, stricter lending requirements and of course, ring-fencing UK banks’ retail banking business from the riskier investment banking operations.

With the new capital requirements in place and ring-fencing fully implemented the banking sector is now subject to annual stress testing to assess resilience to another financial crisis. The body tasked with bank stress testing is The Bank of England’s Financial Policy Committee “FPC”. The FPC’s remit is to ensure the UK financial system is resilient to, and prepared for, the wide range of risks it could face — so that the system can serve UK households and businesses in bad times as well as good.

The results of the December 2019 stress testing were very positive and showed that UK banks could withstand:-

• Deep simultaneous recessions in the UK and global economies that are more severe overall than the global financial crisis
• Large falls in asset prices
• The separate stress of misconduct costs

The FPC concluded that even after the 2019 stress test, banks would still have twice as much capital as in 2007.

Undoubtedly the current market turmoil is a significant test of two of the three bullet points above but as this crisis is not the fault of the banks or the financial system, first central banks and now governments around the globe are implementing significant measures to ensure the impact of economic downturn caused to individuals, businesses and of course banks is minimised.

The range of measures are both monetary and fiscal. Looking at the UK and US alone they have slashed interest rates to historic lows. UK Base Rate was cut to 0.25% on 11th March and again to 0.10% on 19th March. The US Fed Funds Rate range was cut to 0.00%-0.25% on 16th March. Both nations have announced immediate aid packages covering a range of initiatives which equate to assistance of £330 billion for the UK economy and £703.3 billion for the US economy (based on 17th March FX rates).

Given this ongoing uncertainty, our investment policy at Ravenscroft Cash Management is to focus on security and liquidity.

As certificates of deposit mature, we have been:-

• Increasing cash at bank balances on instant access call accounts
• Investing a greater proportion of maturing funds in Treasury Bills
• Investing maturing funds in shorter dated certificates of deposit issued by the better rated banks

This policy is designed to ensure liquidity for clients if needed. Inevitably this policy, combined with the cuts to official rates, means that returns will diminish.

The outlook at the moment is very uncertain. Initially markets were expecting a quick bounce back once the coronavirus was contained and the outbreak subsided. However, the economic damage already done means that this outcome is already unlikely and the spread of the virus is increasing. Authorities are hoping that the size of their response will insulate us from the worst effects but much depends on how things develop.

Keeping Ravenscroft working for you

Our cash team and our colleagues in the Ravenscroft offices in Guernsey, Jersey and the UK have been working hard over the last few weeks to ensure that we can keep working if, or when, additional restrictions and challenges are encountered. As you would expect we have well-developed plans for dealing with disruption and capacity for a large proportion of our team to work from home. The majority of our team is now working from home and we are confident that we can keep our services up and running even if we have to fully close the offices.

As always, if you have any questions or concerns please feel free to give us a call and we'd be happy to talk to you in more detail.