With all the chaos surrounding bank deposit guarantees, I had a thought. At school, most of us learnt to use government securities to determine the risk-free rate for use in models that discounted cash flows. Governments are hardly risk-free (I’m thinking Russia, Argentina, Iceland, et al), but the theory is that they’re about as close to risk-free as you can get. That is, if the government’s in trouble, then we’re all in trouble.

Well, now with government guarantees on bank deposits, we effectively have a new risk-free rate. That is, if governments are backing bank deposits, then bank deposits are consequently as safe as government securities. I don’t know what this means for the world outside of academia, but it’s an interesting consideration for anyone discounting cash flows. 

The counter argument is, in most countries at least, bank guarantees are limited to a certain amount (e.g. $100,000). You would think this would apply on a per person basis, but most reports seem to suggest this is on a per account basis. So, by creating multiple accounts can circumvent limits. In some countries though, governments have placed a blanket guarantee across all bank deposits, which negates the need for multiple accounts. Either way, I stand by the idea of a new risk-free rate in any country where these guarantees exist.