- You must understand the relationship you have with your bank in order to protect your assets.
- What is a "bail-in?"
- How can a "bail-in" affect your rights as a depositor?
In my last article regarding the safety of banks today, I tried to explain the legal relationship you have with your bank:
"Although you may feel that you have a credit balance in your bank account, please realize that your credit balance is only as safe as the underlying bank's assets. Since a bank's assets are generally the loans it owns, the underlying loans of your bank are actually your problem. In fact, most people do not realize that the bank is not a simple depository agent for money. In other words, you cannot simply walk in and demand your money on the spot at any time (assuming you have more than $5,000 in your account). In truth, the relationship you have with your bank is that of a debtor/creditor.
Yes, the legal fact is that the money you have deposited into your bank is a loan you have made to your bank, for which you earn interest. The bank then takes your money and loans it to others, and makes money based upon the differential in interest rates as well as fees. Therefore, just like being in the shoes of any other creditor, if your debtor is on shaky financial ground and your money is sitting in bad loans, this ultimately becomes the problem of the creditor, i.e. you, the individual. And, the percentage of the public that truly understands this legal reality is still relatively insignificant."
You can read that article in full here:
So, while many believe that they can simply walk into the bank and demand their money at any point in time, this is simply not the case. If the bank should run into financial difficulties and default, you will stand in line with the rest of the bank creditors to receive pennies on the dollar through the bankruptcy process.
Of course, many of you are still quite comfortable relying on the FDIC in case your bank runs into a liquidity issue.
"And, if you think that the FDIC has your back, well, consider that in the third quarter of 2010, the FDIC's contingent loss reserve was drained by $6.2 billion, which brought the Deposit Insurance Fund deficit in 2010 to over $21 billion. Furthermore, by that time, the FDIC had already burned through its entire 2010 assessments. Luckily, the market stabilized. But, consider what would happen if we went into a protracted bear market?"
Now, if we look back to the 2008 financial market crisis, we all remember how the government came to the bank's rescue with their "bail-outs." And, no, not all banks received those federal bailouts, as Lehman went bankrupt and others were forced to be bought out. In fact, as we continue our series on banks in the coming months, we will focus on just how unsafe the largest banks truly are in the United States.
When the next major bear market strikes the United States, as we all know will happen, are you willing to bet your savings on the FDIC or another potential government bail-out? I know I am not. In fact, I think what happened in Cyprus during the European financial crisis of 2010 may provide us with some guidance as to what we can expect in the event we experience another banking crisis during the next major bear market.
When the financial crisis hit the Cypriot banks several years ago, which were already in a poor fiscal position after the conversion to the Euro, there was no bail-out being offered (much of the reasons for which seem to have been political in nature). As a result, two of the largest banks were on the verge of closing. Ultimately, Laiki Bank had to be wound down, and the depositors of that bank lost most of their uninsured savings. However, the Bank of Cyprus, rather than wind down as well, entered into a restructuring, and utilized the cash held from depositors for the funds needed to effectuate the restructuring. The depositors were issued shares in the newly restructured bank in return for their deposits which were used for the restructuring. People now refer to this as a "bail-in."
While I do not believe we are on the cusp of a major banking crisis such as the kind seen in 2008 and 2009, if you know my long-term view of the S&P 500, then you know that I do think we can reasonably see another such crisis, and potentially one that is even worse once we turn the corner into the 2030s.
Along these lines, I found it quite interesting that, back in early 2016, Goldman Sachs opened their bank up to public depositor's money. Now, there could very well be many business reasons as to why Goldman has moved down the path of opening its vaults for mass deposits. But, when considering where I view the market several years down the road, along with the fact that many of the larger bank stocks look quite sickly, one has to consider the Cyprus-style potential "bail-in" scenario a little more seriously. Or, at least one has to consider that the likes of Goldman Sachs are taking it a bit more seriously.
Ultimately, one must consider whether they want to place money in the large banks to begin with considering the potential risks being alluded to within many of their long-term charts. So, as I continue to write this series of articles outlining the issues prevalent within our banking system, we will begin discussing some of the larger banks and the issues inherent within their balance sheets over the coming months.
In analyzing the larger banks, we will use the detailed methodology with which we have identified the strongest 15 banks in the country at saferbankingresearch.com. We hope to open your eyes to the risks inherent in the major banks today, which will only become "obvious" once we transition into a major long-term bear market in the coming years. But, by the time it becomes an issue, it is then too late to protect yourself.
Over the coming months, our plan is to begin with Citibank in our next article.