How Safe is Your Money in the Bank?
On Sunday July 5th, the European Central Bank announced it was not going to provide any more financial emergency support for Greek banks. This was the only thing that kept Greek banks in business. A “bank holiday” was announced, closing the banks, as well as the stock market, for the week. ATM’s were still accessible, but Greeks could only take out 60 euros (about $67) per day.
In the week leading up to the “bank holiday”, a prominent politician, Panos Kammenos, assured Greeks, “The banks won’t shut, the ATM’s will (have cash). All this is exaggeration.” Just as in Cyprus in 2013, we see a country in financial trouble, government denials, a surprise bank holiday, wealth confiscation and capital controls. In Cyprus, bank clients of the two largest banks that had over 100 000 euros in their bank accounts saw 47.5% of their secured savings converted to equity, making them owners of 81.4% of an insolvent bank. This method of saving the banks is known as a “bail-in.” European Union regulators gave 11 European nations, including France and Italy, two months to enact “bail in legislation,” according to Reuters in May 2015.
Laws that have been passed, that the average citizen may be unaware of, have essentially put the “bail-in” option on the table before a taxpayer bailout come the next banking crisis.
Should depositors in the United States be concerned about the safety of their money in US banks? The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 contained provisions that stated private bank deposits could be used to resolve the next banking and financial crisis.
Under Dodd-Frank, bank deposits are considered to be the property, not of the depositor, but the bank. The depositor has technically become an unsecured lender to the bank. The bank, therefore, has a contingent liability to the depositor regarding his deposits. This contingent liability can be honored by the bank by giving the depositor back his deposits, or giving him bank stock shares, if the bank utilizes his deposits to make up for the shortage in the legal reserves required to operate or provide funds for the bank. The shares of stock the depositor receives do not have to be in the bank where one deposited the money. It could even be in a new bank created after the “bail-in.” Carlos Lara wrote a fantastic piece in the Nelson Nash Institute’s monthly newsletter, Banknotes, on this subject.
In the United States, the FDIC (Federal Deposit Insurance Corporation) protects bank accounts up to $250,000. The law, however, permits the bank to only hold 1.5% of total deposits.
The FDIC and the Bank of England put out a joint paper in 2012 titled ‘Resolving Globally Active, Systemically Important, Financial Institutions.’ The joint paper stated that, in the event of another 20008/09 banking system and financial crisis, the solution was to “assign losses to shareholders and unsecured creditors.”
Judge Andrew Napolitano remarked in 2013, after being questioned if bank bail-ins could happen in the United States, “People who have more than $100,000 in the bank are targets for any government that’s looking for money to shore up its own inability to manage its finances.”
The financial system is currently full of risk. Government debt levels have never been higher, and there is no sign of them spending less. According to a recent financial report by McKinsey & Company, the ratio of global debt to GDP (Gross Domestic Product) is 286%. Global debt is 286% bigger than the global economy.
Central banks are nearly insolvent. The Federal Reserve Bank in the U.S has less than 1.3% reserve capital.
Pensions and pension insurers are underfunded. The Pension Benefit Guaranty Corporation that insures the pensions of 41 million Americans had a deficit of 62 billion in 2014. The Disability Insurance Trust Fund (part of Social Security) will run out of money in 2016.
Social Security, Medicare and Medicaid are also underfunded.
Banks have very low cash-deposit ratios, and when adjusted for inflation, interest rates are negative. When you hold money in the bank, it guarantees you will lose money through inflation.
We cannot predict the future and what will happen in the event of another financial and banking crisis, similar to the one in 2008/2009. We can, however, take the necessary steps to protect ourselves, our loved ones and our businesses by moving money out of a broken system and into your own banking and financial system. Holding money in a poorly capitalized bank, at an interest rate that pays the depositor less than the rate of inflation, is dangerous. Informed rational people have a plan B.
Yours in purpose and prosperity,
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