Are Your Bank Accounts Safe?
If you will recall the banking fiasco in Cypress, when the government made a mad grab for account holders assets as part of an IMF bailout agreement, it appeared horrifying that something as private as a bank account could be made a “public asset” in an attempt to bail out the Cypriot government. Interestingly enough, new chatter out there from central banks around the globe is that the Cyprus example may not be an isolated event. Instead, “bail-ins” rather than bail-outs may be the new way to cope with financial disaster in the banking system.
Too Big To Fail Banks To Be Saved by “Bail-Ins”
Back in 2008-2009 when the financial crisis hit the banking sector, certain banks were deemed as “too big to fail” and were the recipients of substantial government bailouts funded by trillions of taxpayer dollars. Then Cyprus happened, and many central bankers got the idea that bail-ins could work better with less exposure for tax payers. In Europe, this plot unfolded back in June with the creation of the Bank Recovery and Resolution system. The theory behind this system is to unify the banking system throughout Europe and to have one centralized authority to help resolve banking problems across the union without touching taxpayers. On December 10th, further meetings took place to help finalize the idea before the end of 2013. The discussions surrounded trying to find a “tool kit” that will help bailout banks that were failing, while protecting bank functions and minimizing exposure to losses. At these meetings it was reported that Michael Noonan the Minister for Finance in Ireland commented: “I think the new key phrase is ‘bail-in is going to replace bail-out’”.
Cyprus Set A Dangerous Precedent For The Banking System
When Cyprus made the decision to tap into large account holder’s bank accounts rather than accept a European government bail-out it set the precedence that this is an acceptable way to deal with bank bailouts. This combined with the recent comments by Michael Noonan, indicate that the structure for “bail-ins” could in fact be the new norm.
Could A Cyprus Banking Incident Occur In Banks Here In The U.S.?
If we as Americans think that somehow our banks are safer than the European banks, we are greatly misled. Especially with exposure to the derivative market, which is essentially like Vegas for banks, we can expect U.S. banks to face major losses in the future. However, due to current laws, deposits in the bank are considered the bank’s “asset” not its “liability”. If something were to destroy the banking system, your deposit can be used as a way to keep the bank afloat. This of course will be felt much more acutely by large account holders than it will by the majority of Americans who have much smaller account balances. Whether we are a fan of the policies or not, it’s wise to be aware of the fact that a precedent has been set where your deposits could be used as a major part of bank recapitalization if deemed necessary.
The concerns over the banking system are worth being aware of simply because as an investor you can take steps today to protect your accounts and retirement funds from unnecessary exposure to the U.S. banking system. By looking into different assets such as gold and silver, and managing many of your own “accounts” you can essential become your own bank, and escape many of the potential pitfalls threatening your assets in the current banking system.
For more information on how the U.S. banking system could impact your assets and to learn how to take measures to protect yourself financially, speak to a Redhawk Wealth Advisor near you today.