Imagine waking up one morning and discovering your bank account at almost zero, and it wasn’t taken out or spent by you.
That’s what happened in Cyprus in 2013 when the European Union decided to take money from the accounts of Cyprus citizens in order to bail out the country.
Those account holders who had 100,000 euros or more in their bank accounts had 9.9% of their money levied. Those with less than 100,000 euros had 6.7% of their money taken.
All this was done without any warning.
A 2013 Forbes article explains, “A new strategy has been unveiled around the world, with the first test run in Cyprus. Despite early denials, the "bail-in" strategy for insolvent banks has already become official policy throughout Europe and internationally as well.”
This isn’t something that happens somewhere else. Bank failure is a real and present danger in the US.
Just look at what happened with America’s 16th largest bank. Depositors tried to get their funds out of Silicon Valley Bank until regulators swooped in and shut down the bank on March 10th. Two days later, New York regional bank Signature Bank also failed. What's been lost in the headlines is that Silvergate Bank failed first on March 8th.
To prevent an all-out bank run and to contain a possible bank failure contagion, the FDIC seized the assets of these banks.
Depositors couldn’t get their money out.
In a statement, the FDIC said:
“All insured depositors will have full access to their insured deposits no later than Monday morning, March 13, 2023. The FDIC will pay uninsured depositors an advance dividend within the next week. Uninsured depositors will receive a receivership certificate for the remaining amount of their uninsured funds. As the FDIC sells the assets of Silicon Valley Bank, future dividend payments may be made to uninsured depositors.”
For those who are not insured (those who have over $250k deposited in the bank), they will have to wait to get their money.
This is a case where government regulators stepped in. But will this be the case in the future?
The answer is PROBABLY NOT.
It’s called a bail-in. It’s legal. And bank bail-ins may just be the new bailouts.
What Is a Bail-In?
Remember the 2008 - 2009 crisis? Banks collapsed or were on the brink of collapse. To prevent a global catastrophe, the Federal government bailed most of them out – and it cost us taxpayers a lot of money.
We’re used to the government swooping in and giving money to banks (or businesses) to keep them afloat.
The opposite of the government bailout, is the bail-in.
A bail-in is when banks use depositors’ funds (your money in the bank) to save themselves.
Investopedia explains, “A bail-in provides relief to a financial institution on the brink of failure by requiring the cancellation of debts owed to creditors and depositors. [...] Bailouts help to prevent creditors from taking on losses while bail-ins mandate creditors to take losses.”
How IS this legal?
In 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Act, which ended bank bailouts and made bail-ins possible.
The provision in the Dodd-Frank Act gave the Federal Reserve, the SEC, and the FDIC “the authority to place bank holding companies and large non-bank holding companies in receivership under federal control. Since the principal objective of the provision is to protect the American taxpayers, banks that are too big to fail will no longer be bailed out by taxpayer dollars. Instead, they will be bailed-in.”
Basically, this means banks have the authority to use the money within their banks to stay afloat.
And, anyone who has an account that exceeds the $250,000 FDIC insured limit may be affected. Anything above that amount can be used for bail-in purposes. (More on that below.)
Some suggest that bail-ins are an effective option because they prevent financial institutions from becoming insolvent (or unable to pay debts owed).
BUT many banks are already insolvent!
They lend out our deposit money – not their own.
This is the dirty secret of fractional reserve banking – banks don’t have your money in the bank because they lend it out to make more money.
The law used to require banks to keep 10% of your deposited money in the bank. So, if you put in $10, they had to keep $1, and they could loan out $9.
During the pandemic, this law went away, and banks can now lend out $10 of the $10 you deposit. Now they can give 100% of your deposits away in the form of mortgages and loans.
So, in summary, bail-ins allow banks to confiscate money in accounts that exceed the FDIC-insured $250,000 limit.
But in the next financial crisis – should there be a bank run – will the FDIC be able to cover its promise?
Don’t bet on it.
About that FDIC Insurance…
One section of the Dodd-Frank Wall Street Reform and Consumer Act includes protection for depositors by the FDIC.
FDIC insurance insures each bank account for up to $250,000.
But this shouldn’t provide us with much comfort. Here’s why…
The FDIC insures $9 TRILLION of bank deposits, but they only have $125 billion worth of assets.
In other words, only 1.3% of its holdings are in reserve. It can’t possibly insure everybody, especially in a crisis when many people want to withdraw their money all at once.
To pay for insurance, the FDIC charges fees to banks, and those fees are pooled into a fund called the DIF (Deposit Insurance Fund). If the need exceeds the $125 billion in the fund, the FDIC must borrow from the US Treasury.
And if that happens, the US Treasury would have to borrow from the bond market (i.e., issue bonds).
The problem is that many bonds hitting the market at once would crash the value of bonds, driving the price down and the interest rate of those bonds higher.
And those higher interest rates could possibly cause more bank failures.
It’s a vicious cycle.
In short, the FDIC insurance isn’t the comfort they want you to believe it is.
Let’s not forget – the insurance was ignored in the Cyprus bail-in.
Bank depositors filed a compensation claim following the bail-in to receive compensation for their lost funds.
The European Union said in a news release, “The Court concludes that the individuals and companies which initiated the actions have not succeeded in demonstrating an infringement of the right to property, of the principle of protection of legitimate expectations, or of the principle of equal treatment.”
In short, no compensation was given.
That’s not all.
The worst part is that the FDIC knows this is coming.
Federal Deposit Insurance Corporation (FDIC) officials met recently to discuss how to deal with the next approaching market collapse and how to hide alarming data from depositors to prevent bank runs.
(Remember, the European Union initiated the bail-in in Cyprus without telling citizens to avoid a bank run.)
At this FDIC meeting, it was clear that they know bail-ins are coming but that they don’t want the public to know.
One FDIC member said, “You’ve got to think of the unintended consequences of taking a public that has more full faith and confidence in the banking system than maybe the people in this room do.”
Do you really trust a bunch of guys in a room who think you’re too stupid to be warned about what’s coming?
Do you trust FDIC insurance will hold up in the event of massive bank runs?
How to Prepare for the Coming Banking Crisis
- Stock up on food staples and ancillary items now. It’s important to keep food staples on hand, as well as stocking up on seeds and purchasing the tools needed to grow your own food. The reason is simple. With all of the forthcoming banking changes, one may be the introduction of CBDCs (Central Banking Digital Currencies). If this happens, the government can control what you buy.
Buy gold, silver, and tangible assets. If the banks go bust, you want tangible assets to protect your wealth. See Also: Why Gold Still Has a Strong Role in Your Emergency Preparedness Plan.
- Spread your money across different financial institutions. You shouldn’t have too much in one bank. You may opt not to have any money in banks, since bank runs will be an issue if bail-ins happen.
- Prepare to barter. Buy things you can barter later, such as ammo, alcohol, and seeds to set yourself up before it’s too late. See Also: Top 10 Bartering Items + Skills Every Prepper Needs.
- Don’t be dependent on banks or the government. Practice self-reliance. Buy land, start gardening, and learn valuable skills now that will help you later.
- Stay educated. Stay up-to-date on what is happening in the financial markets. Know the rules regarding where you put your money. Make wise choices.
Protect your financial future, friends.
Preparedness Advisor, My Patriot Supply