Recently, I discovered the last local bank in the area is being bought by a bank with eight times more exposure to derivatives. As I attempted to explain the dangers of this increased exposure to my family one evening, I realized my father may have more than the current FDIC insured limit stashed in this one bank.
In an attempt to make the case for him to at least spread out his savings, I have been researching the many reasons he should consider changing where his money is kept. I believe it is important for everyone to recognize the danger associated with having too much money in the banks, as well as the even greater danger of having it all in one bank.
Reason One: You might need your money and not be able to get it out.
When you deposit your money in the bank, they give you an IOU, and it is theirs to do what they wish. They don’t hold it in the vault you see in the front lobby. The money is lent to other people to buy homes and cars so the bank can earn interest, or the money is invested in other investments, such as bonds, to earn a return. The bottom line is, the bank only has access to a small percentage of the money needed to cover all of their deposits. Historically, when a bank runs into a crisis where more people want to withdraw money than the bank has on hand, the bank limits how much can be withdrawn. A recent example from a large bank can be seen from HSBC, as reported by BBC “HSBS Imposes Restrictions on Large Cash Withdrawals”. If you cannot withdraw your money, what good is it?
Reason Two: The days of earning money by having it in an interest bearing account are long gone.
Here in the U.S., I guess we are still fortunate. In my interest bearing savings account, I am earning 0.19 percent. Make sure you read that right. That is not 19 percent. That is a little less than one fifth of one percent. In some parts of the world, the negative interest rates make it so bank depositors actually pay the bank to take their money. It really does not matter if you earn interest though, because it is nearly impossible to find a bank account paying more than inflation. If you have $100,000 in your account this year and earn .19 percent, at the end of the year you will have $100,190. Let’s say we use the current, laughable, inflation rate for the last twelve months published by the U.S. government of 1%. (It is much higher in reality.) This means your $100,000 deposit today is worth $99,190 after a year. Our money is worth less as time goes on, even though we might earn a little interest.
Reason Three: Banks have been given permission to steal their depositor’s money.
The Bail-Outs of the big banks after the 2008 crisis did not go over very well. The government used taxpayer money to make sure banks, who made terrible investment decisions, did not suffer any consequences. (Watch The Big Short movie.) Since then, the Dodd-Frank bill was passed to assure the next crisis will take a much larger toll on me and you, the average bank depositor. Essentially, if there is a crisis, instead of getting money from the government (taxpayers), the banks now have permission to take money directly from their depositors. We know this was done in Cyprus, but we need to realize legislation has already been passed in the U.S. for the same type of Bail-In.
Check out the following article on Dodd-Frank. It clearly lays out the disturbing list of who banks are responsible for reimbursing in the event of a crisis, and in what order. Unsecured debts, such as checking and savings account are eighth in line, behind the government and banking executive salaries.
Reason Four: Your money in the bank is not as insured as you think it is.
I want to go back to Cyprus for a moment. Did you know the money in those accounts was also insured, just as the FDIC insures yours? Read
More disturbing to me is the FDIC can only afford to cover a small portion of bank account deposits they currently claim to insure. They cannot possibly meet their obligation of up to $250,000 per account in a major crisis with the money they show as available. In addition, they do not know how much each bank would need, and their antiquated systems would not be able to handle the distribution of the money they do have. “Even FDIC Admits It’s Not Ready For Next Banking Crisis”
If you want more detailed information, Here is the actual document where the FDIC admits their inadequacy.
The FDIC is the federal government. Are we supposed to believe the government, who is somewhere between $14 Trillion and $20 Trillion in debt (that they admit to), will actually cover all of the insured accounts? If they are forced to, I imagine they will just insert another Trillion dollars into their balance sheet, essentially adding it to the taxpayer’s burden, and send that even more worthless money to cover the accounts. We live in the United States of Insolvency
Reason Five: Money in the bank is all electronic now, making it vulnerable to hackers.
Hackers these days are very good. We hear about new data breaches all the time. Were you aware even the FDIC has been hacked? The Washington Post reports “Inadvertent Cyber Breach Hits 44000 FDIC Customers”.
The troubling thought I have about hackers is their ultimate goal is not to let anyone know they are hacking. Think about this… if a hacker currently has access to any financial system, are they going to announce it, or are they going to keep quietly gaining access to the information for as long as possible? I have a feeling, for every instance of stolen information, there are many others we never know about. Guess what? “No, the FDIC Doesn’t Insure Your Bank Account Against Cybercrime”.
Reason Six: With your money in the bank, the government has access to your financial information.
Have you tried withdrawing more than $10,000? In 1970 the government passed a law saying banks had to get ID and file a report for any withdrawal, or deposit, over $10,000. Recently, I have been grilled by the bank teller for even smaller withdrawals. The tin foil hat wearing part of me wants to believe this paper trail is actually unnecessary anyway. I believe we are kidding ourselves if we think the NSA does not have access to all financial transactions within the banking system. If they eventually manage to get rid of cash, you will not be able to buy a pack of gum without the government knowing about it. In addition, the second article linked below makes another good point about removing cash. If they implement negative interest rates, you will not be able to avoid paying these negative interest rates by keeping cash outside of the banking system. Two articles: “Federal Banking Rules on Withdrawing Large Sums of Cash” and “Why Governments Want to Eliminate Cash”.
In Reason Two above, I pointed out with a $100,000 deposit that I will potentially earn $190 in interest. The only question I (and you) need to answer is this… is it worth $190 to expose my $100,000 deposit to Bail-Ins (legal theft), hackers, government meddling, and government access to my financial transactions? The answer for me, and hopefully for anyone after reading this, is “no”.
I would recommend having a portion of your money in cash outside of the banking system where you have access to it when needed. When I proposed this option to my wife, she was concerned this would expose the money to theft if there was ever a break in, or destruction if there was a fire or other natural disaster. For these reasons, I would suggest dividing your money and storing it in multiple locations. You will probably want a portion in a fire resistant home safe, where you have immediate access if needed. Another portion could be stored with a trusted relative. You may also consider keeping some outside the home, safely buried. See this article for tips on preparing a buried cache.
I would also recommend not leaving more than $50,000 in any single bank, if you decide to use the banking system. My reasoning for this is simple. Every time the government says they are doing something for the people, they promise to “take from the rich people” to make it happen. If they do implement a Bail-In, I believe there is a good chance they will have a floor where people with under a certain amount in deposits will have less stolen by the Bail-In than everyone else. In Cyprus, bank accounts with less than 100,000 Euro were penalized at a lower percentage. I don’t know what the amount will be here if it happens, but they have to keep the people who vote for them happy if they want to get reelected, so I expect some benefit to be given to those with smaller deposit amounts.