In light of the recent financial crisis, Neil Cullum discusses
risk and return in relation to cash deposits.
Generally, people are able to accept that their investments in
stocks and shares might go down in value. They are even able to
come to terms with the fact that their house might be worth less
now than it was a year ago. However, they find it hard to believe
that their cash might not be safe in the bank.
Since the rescue of Northern Rock, we have seen the near
collapse of the international financial system. Governments have
stepped in with everincreasing injections of liquidity, which has
culminated in a co-ordinated approach to recapitalising the system.
At last, the strategy appears to be working and interbank lending
rates are starting to return to more 'normal' levels.
However, we are unlikely to see inter-bank rates restored to the
previous structure where, in effect, they contained no risk
premium.
