The alternative to money in current accounts (liquidity is under attack)


As anticipated in the last article today, vi I propose a comparison between two very different forms of investment but which can both represent a first alternative to maintaining money on the current account that we have seen under attack (READ THE ARTICLE).

Let's start the comparison from the operation structure.

The deposit account is a form of time deposit in which the amount is bound for a set period of time. In practice it is a loan to the bank with a pre-established maturity, remunerated with an interest rate established at the time of the transaction. The bank will have to repay the capital at the end of the deposit, and in this sense it is "guaranteed capital" and the capital is not affected by fluctuations in the financial markets. The main risk, considering that it is a loan to the bank, is the so-called counterparty risk, understood as the possibility that the bank is unable to repay the investor, in whole or in part, the amount invested. So we could say that it is capital guaranteed until the bank can repay it. The risk is concentrated on the bank you choose for the investment.

The First Branch Policy, also called traditional or revaluable policy, it is an insurance form in which the premiums paid by the contractors flow into a fund specifically created by the insurer and managed separately with respect to the other activities of the Company. For this reason, the fund is called Separate Management. The assets are guaranteed and cannot be disregarded and cannot be attacked by third party creditors. The Separate Account uses the premiums collected by purchasing multiple financial instruments almost entirely of the bond type, issued by various counterparties. In this case the risk shifts from the company (whose eventual bankruptcy does not involve a loss of capital for the management, which is separate) to the various counterparties in which the premiums are invested. The company also contractually guarantees the capital to the contractor, assuming the counterparty risk on itself: if part of the obligations in the Separate Account should not be repaid, the company undertakes to pay the contractor the entire paid-up capital.

For the above we can derive a different guarantee provided by the two instruments.

In the Deposit account the guarantee is provided by the bank, the only counterparty to the transaction. To mitigate the counterparty risk, the guarantee of the Interbank Deposit Protection Fund (Fitd) acts within the amount of 100,000 euros per individual depositor. On the maintenance of the guarantee offered by the Fitd the debate is open (you can read the article of 11.11.2018). Over 100,000 euros per depositor, in the event that the bank is in difficulty, the excess amount is included in the scope of application of the so-called "bail-in" and could be subject to reduction or conversion into shares of the bank, following hierarchy of protection provided by the "bail-in" itself.

In the First Branch Policy the guarantee is offered primarily by the insurance company, but the real guarantee is provided by the degree of diversification of the assets of the Separate Account. The more this asset is diversified and the less is the risk that the Company suffers losses that it may not be able to bear.

The First Branch Policy, for the legislation that regulates its operation, also offers a second level of guarantee, which in this scenario of bonds with negative rates makes it like an oasis in the financial desert. Let's take a concrete example. If today a saver buys a bond fund that invests in European government bonds, he is indirectly buying government bonds which in the vast majority of cases have very high prices and perhaps even negative returns. If the rates return positive, the prices of those securities will decline and our saver will suffer a loss on the capital. If the same saver chooses to invest in a separate management, the management for him will partly buy the same government bonds, but with a fundamental difference: the risk of a fall in the prices of these securities will not have an impact on the capital invested as in separate management the securities are valued at "historical cost" (ie at the price at which they were purchased) and not at "market value" (in the meantime dropped). In this case, our saver will benefit from the interest paid by those securities (the coupons) regardless of the risk of falling prices. An oasis in the desert.

Paolo Rimbano

The last difference I propose to you is tax.

The deposit account is subject to stamp duty of 0.20% per annum on the invested capital. Interest is paid a substitute tax of 26%.

The First Branch Policy is not subject to the stamp duty of 0.20% per annum (it is the only form in addition to the pension funds for which this tax does not apply). On the annual revaluation (interest) a substitute tax is paid that depends on the percentage of government bonds in the Separate Account: currently the average tax fluctuates between 16% and 19%.

In the next article we will see the elements to consider when choosing these two tools.

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