Guernsey: Back To Basics

Last Updated: 21 November 2008
Article by Pierre Paul

Most Read Contributor in Guernsey, September 2018

Originally published in the Captive Review, Guernsey Report, October 2008

Pierre Paul of Royal London tells Captive Review about managing liquidity in the credit crunch and offering reassurance in troubled times

Our liquidity management business draws on a money market pedigree which stretches back over 100 years. The business was set up by Union Discount, which was founded in 1861 to act as a liquidity conduit between the Bank of England and the commercial banks.

Over the course of those 147 years the money markets have seen many disasters and near misses, including the secondary banking crisis which came to a head in November 1973 when the London & County Bank tottered on the brink of collapse.

The then Governor of the Bank of England, Gordon Richardson, saw that more banks were becoming insolvent and that this would affect the bigger banks who had rashly over lent to the secondary banks. In the same spirit that inspired the first Baring rescue in 1890, the Bank of England called together a consortium of bankers who put up funds to support the fringe banks and see them through the crisis.

This support operation became known as 'the lifeboat', which ensured that there was no panic or runs on banks, and prevented what the Governor described as "a widening circle of collapse from the contagion of fear".

Some similarities can be drawn between the 1973 crisis and the current credit crunch, which has led to the first run on a major UK bank for 150 years and ultimately ended with the nationalisation of Northern Rock. We can only hope that the current concerns over higher energy and food costs do not create another winter of discontent with the attendant ramifications for unemployment, property prices and banks' balance sheets.

The three pillars

So, having looked at what history can teach us about current events, how do we put those lessons into practice in the day-to-day management of money? Well, in our experience, there are three pillars that support our service.

1) Biggest is best

The first pillar, 'biggest is best', refers to the concept of systemic risk, in that there are certain financial institutions which are too big to fail. The theory is that if the authorities were to let a major financial institution fail it would create so many side effects that the whole financial system would collapse precipitating a social and economic catastrophe.

The problem here is in quantifying that which is too big to fail, and while we can only speculate on where the cut-off point might be, recent evidence would suggest that the authorities will do everything in their power to prevent the outright failure of any bank or building society. This might be the case in theory, in practice, however, there is the delicate matter of dealing with the perception of risk and, most importantly for a liquidity manager; liquidity.

With risk comes reward. In chasing higher interest rates which may mean dealing with smaller institutions or lending for longer terms there is an assumption, however small, of an increase in risk. This is not necessarily the risk of financial loss but more usually the risk of a loss of liquidity; that is, the ability to get your hands on ready cash.

As a liquidity manager we achieve liquidity by investing in negotiable money market instruments called Certificates of Deposit (CDs). A CD is 'liquid' because before a CD matures it can be sold for same day value in the interbank market.

However, CDs issued by the biggest banks with the best credit ratings trade at better rates than those issued by smaller banks with lower ratings. This means that CDs issued by bigger and better rated banks are the most liquid and, naturally, a sensible liquidity manager will invest accordingly.

2) Diversification

Second in our school of thought is that it is essential to diversify the exposure to the banks and building societies to which we lend our clients' money. We set a limit of a maximum of 10% of a client's portfolio to any one institution. This is a simple rule which, when applied to a portfolio of £10m, restricts exposure to £1m per name.

The ability to diversify without losing the ability to command market rates is difficult to achieve without significant levels of funds under management. As the Royal London liquidity management arm administers over £4bn (London and Guernsey figures as at 31 July 2008), we achieve full diversification across a broad spectrum of banking names. Additionally, our approach to diversification is that, as well as a healthy institutional spread, it is important to have a good geographical spread. Therefore, we ensure that we do not simply use UK banks but spread the exposure across the banking sectors of a number of countries, including the Netherlands, France, Germany, Spain, Sweden, Finland, Australia and the US.

3) Understand your market

Our third rule is that you should only deal in what you understand. This refers to chasing higher returns by investing in niche or hybrid securities, such as assetbacked commercial paper issued by formerly highly rated but intangible financial structures. The market in these instruments was brought to a juddering halt by the credit crunch, but 18 months ago it was possible to invest cash in all manner of asset-backed commercial paper whose assets were mortgages which had been 'sliced and diced' by investment banks on behalf of their commercial bank clients.

The value of such assets has fallen as liquidity has dried up, requiring huge write downs or, in the case of some money funds, cash injections by the parent company. We question the reason for investing in these assets in the first place. The securities were issued by structures few people had ever heard of and the returns were only marginally better than the returns achievable from CDs issued by solid dependable household names. Our view is that we would always prefer to deal with something we know and can (almost) touch, and to avoid assetbacked commercial paper like the plague.

Gresham's Law

Using these three basic rules we have managed our way through one of the worst financial crises of recent times. While it hasn't been easy there have been undoubted benefits. Firstly for our clients, who have seen their returns rise as banks compete with each other for wholesale funds, pushing interbank rates up far higher than current economic conditions would dictate. And secondly for our business, as people realise the many benefits that a dedicated liquidity manager can provide.

In conclusion, the recent episode can be likened to the effects of the rule of Gresham's Law which says that "bad money drives out good". Gresham's Law is named after Sir Thomas Gresham (1519 to 1579) an English financier in Tudor times who observed that de-based coins ('bad money') with the same face value as proper legal tender ('good money') would tend to replace good money as people would hoard all the good money leaving the bad to circulate.

The analogy with current times is that banks have had to hoard good money in the form of top quality securities which have risen in value, while shunning bad money in the form of low grade securitised bonds which have plunged in value.

History is a useful tool which is why a company like Royal London Asset Management, with a liquidity management business which can trace its roots back over 100 years, is able to provide an additional level of service; that is, reassurance in troubled times.

For more information about Guernsey's finance industry please visit

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions