Perhaps at no time since the great depression of the 1930s have things been so bad for the financial markets. Unless the various measures being implemented by govern-ments and central banks around the world have a positive effect in freeing up the credit markets (and hence inter-bank and consumer/business lending) in the near term then the crisis is likely to be equally bad on main street.

Things appear to be getting so bad that many folks are talking about keeping their money under the mattress. However, before you all go rushing to your bank to withdraw your money take heed that this is not a safe thing to do.

Apart from the obvious security issues associated with keeping large amounts of money at home, one should also note that in the eventuality that the money is stolen then there would be no recourse to anyone.

Deposit insurance is a measure taken by banks in many countries to protect their clients' savings, either fully or in part, against any possible situation that would prevent the bank from returning said savings. In Jamaica the JDIC (Jamaica Deposit Insurance Corporation), which is a statutory body, provides protection to small savers and exercises a shared role in safeguarding the country's financial system.

Other key objectives of the JDIC include:

. Maintain and restore confidence in deposit-taking institutions and by extension contribute to the stability and confidence in the nation's financial sector;

. To contain contagious runs on financial institutions in the event of a failure;

. To provide clearly defined system for dealing with problems of insured financial institutions.

So what level of coverage do I get as a depositor in a bank?
At present the JDIC only provides coverage up to JA$600,000. This means that any amount deposited with an insured institution above this limit would not be guaranteed by JDIC and hence could be lost if the institution were
to default.

Given the above, and on the assumption that you have more than JA$600,000 in savings/ deposits, you might be tempted to adopt the US Democratic presidential candidate's stance of "spreading the wealth around" by only depositing amounts up to the $600,000 across various FDIC-insured institutions. However, this is not a pragmatic approach for those individuals with large amounts of cash.

Over the past few weeks, the BOJ has become the lender of last resort (which arguably is its role for commercial banks and those institutions that it regulates) to all financial institutions requiring USD liquidity to meet margin calls related to their leveraged purchase of GOJ securities. It has been reported by Standard & Poor's most recently that the level of foreign reserves fell by some US$300 million as the BOJ intervened in the foreign exchange market to support the currency, which still depreciated by 2.8 per cent during the period under their review.

Although necessary, it remains to be seen whether the BOJ action will be sufficient to return normalcy to our financial institutions. I for one suspect that normalcy will be a function of whether institutions continue to employ the same level of leverage and hence risk as leading up to the current credit crisis. It is evidently clear that more stringent and closer supervision of insti-tutions by BOJ and FSC
will be required going forwards in order to provide added protection to depositors/ investors.

The adequacy of some financial institutions' liquidity risk measurement and manage-ment processes has been clearly called into question and requires overhauling and has very much contributed towards some of the pressures facing the financial sector at present.

Meanwhile however, deposi-tors should not panic but think carefully about which institu-tions to either deposit or invest their funds. Decisions should not just be taken on the basis of interest rates but should also consider, amongst others, the credit-worthiness of the institution, its capital base (basically how deep are its pockets), its track-record, its financial performance as well as the credibility of its management team.

- Dr Howard Haughton is an internationally acclaimed expert in risk management and managing director of Holistic Risk Solutions (the Jamaican incorporated subsidiary of a UK consulting company) providing consulting and training services within the financial services sector. Haughton has held senior positions in a number of institutions including JPMorgan, Deutsche Bank, Merrill Lynch and Dresdner Bank.

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