After the financial debacle in Cyprus last month, some investors may be rethinking the idea of bank deposit safety.The decision to force Cypriot savers into a bailout came after the country’s largest banks became too highly leveraged and then compromised their solvency by making poor investments.Over the last several years, the Cyprus banking system grew to the point that deposits exceeded seven times the size of the 18 billion-euro Cypriot economy.Ultimately, the island country was forced to seek European aid after its banks lost 4.5 billion euros on Greek sovereign debt and failed to meet established capital requirements.Industry analysts cited the rapid accumulation of funds from wealthy foreigners as the main reason for the unstable growth profile and credit deterioration.Another blow up in Europe hardly seems a big surprise these days, but the ultimate resolution was without precedent. In order for Cyprus to receive the €10 billion bailout the country needed before the European Central Bank (ECB) pulled funding, the nation conceded that bank depositors with funds in excess of €100,000 would lose a large chunk of their investment.While an earlier proposal called for all depositors to take a haircut, the final compromise permitted bank depositors under €100,000 to be guaranteed by the sovereign government.However, holders of deposits greater than€100,000 were forced to take big losses with 37.5% of their deposits converted into dubious bank stock while forfeiting the remainder.The Cyprus event was similar to Iceland’s banking crisis in 2008.Until the crisis reached a head, the major Icelandic banks had assets about ten times the size of Iceland’s economy. In that case, a good part of the investors were located in the UK and Netherlands.To resolve the situation, domestic assets and liabilities were transferred from the old banks to three new lenders. But the foreign bondholders and depositors were left in the old banks, which were allowed to collapse.That meant depositors in the UK and Netherlands received nothing from Iceland but instead were ultimately compensated to an extent by their own governments while negotiations for the full amounts are ongoing.Lessons LearnedThe lesson to be learned from Cyprus and Iceland is that investors in those countries having little or no government deposit insurance would be wise the review all available options before committing a large portion of their short term funds to bank savings accounts or certificates of deposit.In Bermuda, for example, bank depositors are only protected up to a total of $25,000 while in the Cayman Islands no deposit insurance exists. Furthermore, the Bermudian Government is still spending considerably more than they take in, placing the ultimate guarantor on increasingly shaky ground. Just a few weeks ago, Moody’s rating service placed the country on review for a possible credit downgrade.Reasonable AlternativesBank depositors are generally interested in two things: safety and of return on their investment. Of course, with deposit rates hovering down around zero while inflation is about two percent, depositors have effectively been allowed only the ‘peace of mind’ aspect of investing.Peace of mind seems to go along with bank deposits, but as the foregoing examples illustrate this is not always the case.In order for a bank to remain profitable, bank deposits must be soon loaned out or otherwise invested.Moreover, loans are likely to be made back into the local market. In the case of Bermuda, those loans represent a very concentrated risk in comparison to the world economy.An alternative solution for investors needing both safety and liquidity is through a short-term, investment grade bond fund.A short term bond fund invested in a combination of US. Treasuries, high grade corporate bonds and asset-backed securities should even provide somewhat of an income return in addition to the safety of being exposed to much larger and more diversified markets.Size MattersAnother consideration for bank depositors should be the size of their investment. Investors familiar with the America’s financial system understand that bank deposits are somewhat of a “sacred cow” — but only to an extent.Clearly, the plethora of government programmes implemented during the financial crisis of 2008 and 2009 were aimed at renewing investor confidence in the financial system in the light of the dramatic paper losses on most publicly-traded securities incurred at that time.During the crisis, the FDIC deposit insurance limit was enlarged from $100,000 to $250,000. The increase was originally intended to be temporary, but was later extended through the end of 2013.The Dodd-Frank Wall Street Reform and Consumer Protection Act made the increase in the FDIC’s coverage of bank deposits permanent.When push comes to shove, as it did during the 2008 credit crisis and more recently in Cyprus, smaller investors are generally better protected.Those bank depositors in Cyprus who were unfortunate enough to have placed more than €100,000 are in rough shape.The reality is that politicians are more likely to back proposals which help the greater public rather than the wealthiest subset of the population.Therefore, large investors in any jurisdiction would be wise to consider all possible alternatives, including spreading their bets around.The good news for wealthier clients is that more options are available.For example, clients in Bermuda with a longer term time horizon can buy Bermuda Government bonds or a government guaranteed preferred issue paying about three percent.Borrowing direct from the government effectively cuts out the middle man by investing directly in the entity most likely to bail out the savers anyway.For more conservative investors, better options include broadly diversified money market funds, bond funds or separately managed accounts for those with a larger asset base.Bryan Dooley, CFA is a senior portfolio manager at LOM Asset Management Ltd in Bermuda. Please contact LOM at 441-292-5000 for further information.This communication is for information purposes only. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, investment product or service. Readers should consult with their Brokers if such information and or opinions would be in their best interest when making investment decisions. LOM is licensed to conduct investment business by the Bermuda Monetary Authority.