Monday, June 25, 2012

Simon Black Banks in Georgia

Not the state, but the country that has made an enemy of its large neighbor to the north.

I’ve spent the last several days re-examining the local banking sector and diving into the numbers, and my analysis has led me to the conclusion that it’s one of the best capitalized banking systems in the world.

To give you an example, it’s common for banks here to hold in excess of 30% of their deposits in CASH. They don’t loan it out, they don’t invest in stupid government bonds or CDOs… they actually hang on to their customers’ funds.

I don’t know Simon Black.  I have never met him.  I wouldn’t know him if I sat next to him at an airport.

However, I don’t believe any outsider can examine a single bank, let alone a banking system, and conclude from a look at the numbers that it is safe.  I don’t believe anyone with significant experience in banking can go to another bank and make such a determination.  I don’t believe a highly accomplished bank auditor can do this.  But Simon Black has.

Just this morning, in fact, I negotiated a 1-year fixed deposit rate with a local banker on behalf of SMC subscribers for 10%… in US dollars.

This has flashing red lights written all over it.

1)      How will the bank earn enough on deposits to sustain such a payment? 
2)      How can the bank earn this amount while supposedly holding 30% of its customer deposits in reserve? This is over 14% on invested capital.

We have seen this story before: banks paying the highest rates for CDs are often the ones having the biggest liquidity crunch; banks offering deposits in an outside currency get squeezed when the exchange rate turns against it; the nation behind the bank backstops local currency deposits but not deposits made in other currencies.

As I said, I don’t know Simon Black.  I have enjoyed reading his free daily email, but this one causes me to consider that his recommendations should be taken with a grain – or more – of salt. 

Ten percent interest income on US Dollars in Georgia.  This won't end well for those who take Mr. Black's advice.

1 comment:

  1. Yeah, just dropping into a country and being able to assess the financial system in no time, that is some super skill there...