Savings Risk in the New
By Dr. Jeffrey Lewis
The illusion of
deposit safety continues to prevail among the population living in the United
States, but does the Federal Deposit Insurance Corporation or FDIC offer a true
guarantee for bank deposits?
The FDIC is a U.S.
government corporation that operates as an independent agency, and banks pay
premiums to the FDIC to insure the deposits they accept from the public. The
FDICís reserves are actually quite small compared to the amount of deposits it
insures, with mandated coverage of only 1.35 percent required in its Deposit
Insurance Fund or DIF.
Although it claims
to be backed by the full faith and credit of the U.S. government, the FDIC is
currently only authorized to borrow up to a limit of $100 billion from the U.S.
Treasury, although the FDIC and Fed boards may tap into a temporary extension of
up to five times that amount.
Even with the
extension, this credit line and the DIF would be insufficient to cover more than
a fraction of the roughly $8 trillion in total insured deposits in the case of a
severe U.S. banking crisis. This fact should be taken into account when
assessing the probability of the FDIC being able to effectively insure bank
Security in the Wake of the Cyprus Template
What would happen
if it actually mattered where you held your deposits in terms of a financial
institutionís creditworthiness, and not just whether or not the institution was
idea that the past is often a good indicator of the future may provide a basis
upon which to analyze likely scenarios for a U.S. banking crisis.
The template for
such a crisis has now been unleashed on Cyprus. The bailout mantra and the
obsession with the FDIC have made depositors overly reliant on bailouts, which
are simply the addition of liquidity funded by money creation.
depositors have typically been negatively affected when banks become insolvent.
As Euro group President Jeroen Dijsselbloem recently pointed out, this seems to
be part of the nature of banking, i.e. to pass a bankís losses on to both their
shareholders and those who entrusted them with deposits.
versus Solvency Problem and Politics
No one knows if
the recent decision regarding Cyprus was purely politically driven or if it was
based on the realization that this was an insolvency problem that adding more
liquidity simply could not fix.
Basically, if you
have substantial cash deposits held in a bank, you might want to ask yourself if
you really need to take the risk of having a large exposure to an increasingly
broken financial system.
depositors were paid interest on their money because deposits were a bank
liability or debt. Now, that is no longer the case thanks to the Fed.
In other words,
depositors are being asked to assume all the bank failure risk, but they are
receiving hardly any benefit from having their money "parked in a bank" in terms
of being paid a decent rate of interest on their savings. This state of affairs
makes owning a hard currency like silver or gold seem more and more attractive.
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