The financial markets are once again flashing warning signs. Recent spikes in the cost of credit default swaps (CDS) tied to major banks are highlighting growing concern about credit risk in the financial system. For investors and institutions holding significant amounts of unsecured cash, this is a moment that demands attention – and swift action.
CDS contracts function as a form of insurance against the default of a borrower. When the cost of a CDS rises, it reflects the market’s perception that the likelihood of default is increasing. Over the past few weeks, the cost of insuring against bank defaults has climbed notably, suggesting that investors are growing uneasy about the ability of certain banks to weather ongoing economic pressures.
This is not merely a theoretical concern. Rising CDS spreads are a clear, market-driven indicator that banks are becoming riskier places to leave unsecured funds. Whether due to political uncertainty, persistent inflation or exposure to high-risk sectors, banks are facing growing scrutiny, and so too should the decisions made by depositors.
Many institutions continue to leave large cash balances on deposit, often without questioning the underlying creditworthiness of the banks holding their money. But as CDS spreads widen, this complacency could prove costly. Unsecured deposits are exactly that, unsecured. In a worst-case scenario, these funds could be subject to delays, bail-ins or worse.
The current environment is making it increasingly clear that treating all deposit options as equally safe is no longer prudent. It is time to reassess.
Fortunately, there are safer alternatives. Secured deposit products, those backed by high-quality collateral or structured via reverse-repo-based mechanisms, offer a compelling solution. These products allow institutions to keep cash working, without taking on unnecessary credit exposure.
As banks face higher funding costs and rising CDS premiums, they are also offering more competitive rates on secured structures to attract stable capital. This creates a window where security and yield do not have to be mutually exclusive.
The rising cost of CDS protection is not just a market curiosity, it is a signal. A signal that unsecured exposure to banks is getting riskier. A signal that credit risk is rising even in corners of the market once deemed safe. And perhaps most importantly, a signal that now is the right time to move cash into secured deposits that protect against precisely this kind of uncertainty.
In volatile times, preserving capital is just as important as growing it. With spreads wide and risk premium high, this is a moment of both caution and opportunity.
When cash deposits are secured against high-quality government bonds, the interest rates are often comparable to, or even higher than, those offered on unsecured deposits. In fact, yields typically improve further depending on the quality of the collateral selected. When factoring in the cost of a CDS alongside the returns on unsecured cash, secured deposits become significantly more attractive, offering far superior risk-adjusted returns.
Justin Clapham is CEO and co-founder of Consort1
Access to the reverse repo market remains out of reach for many due to substantial barriers to entry. Even some of the largest institutions lack direct access. This is precisely where Consort1 steps in.
To secure your cash deposits, choose from a broad range of collateral, and access higher, more stable yields, contact Consort1 today:
enquiries@consort1.com
www.consort1.com
020 8142 8888
