Banks Can Steal Your Money

The concept of financial freedom is often misunderstood. Many people immediately assume it means having lots of money. That is not necessarily the case. You could have lots of money but have no immediate ownership over that money. For example, if you have the bulk of your money invested in a private equity fund that only gives you access to your money after a couple of years, your ownership of that money is limited. If you have the bulk of your money invested in a bank, the bank “owns” that money and you need to ask their permission to access it. You legally own the money, but banks control your money and the freedom they enjoy with your money has been growing over the past 10/15 years.

Most people are familiar with the term “bank bailout”. It entered the mainstream lexicon in 2008 with the collapse of Lehman Brothers and the financial crisis that ensued. For those of your either too young to have lived through it or too old to remember, here is a quick summary. Lehman Brothers was one of the most powerful investment banks in the world. An investment bank is not a traditional bank in that it does not receive deposits and make traditional loans like mortgages, auto, and credit card loans. Instead, they help institutions and wealthy individuals raise capital in the securities market. Lehmans got into trouble by taking on too much leverage in the real estate market, and when the real estate market turned, they did not have enough liquidity to weather the storm. This resulted in panic spreading throughout the banking industry and normal depositors started to question the health of ALL banks. Governments rushed in to avoid a run on the banks and started to bail out and support banks to allay the fears of depositors. After this happened, a new phrase crept in and that was “bail-ins”. So what exactly is a bail-in?

This is an alternative to a bailout because bank bailouts were not greeted with much enthusiasm. At first, the average person was relieved that governments were prepared to backstop the banks in 2008 and avoid a freeze in the global banking system. But as the dust settled, people started to question the congruency of the situation. The majority of the banks that found themselves in trouble in 2008 did so because they had acted recklessly. Like Lehman Brothers, they had made massive speculative bets in the real estate market and they had lost money. By bailing out these banks, they were sending the wrong message to these banks. Governments were basically encouraging them to continue taking risky bets. If those bets paid off, the profits would belong to the banks, but if they lost money, they could always rely on the governments to bail them out. This became known as the privatization of profits and the socialization of losses. People who ran non-banking businesses were up in arms and questioned why they could not be afforded the same luxury. The moral hazard of bank bailouts became a heated debate in the press and on social media. This forced governments and regulators to come up with another solution that was less morally hazardous.

The bail-in does not require external assistance to help troubled banks - instead, it allows banks to use customer money! Yes, you read that correctly. A bail-in allows banks to use your hard-earned money to cover losses they may incur in the day-to-day running of the bank. We did not have to wait long after the Lehman collapse to get our first taste of the bail in with the 2012-2013 Cypriot financial crisis. The largest commercial bank in Cyprus (aptly named the Bank of Cyprus) got into financial problems. In order to get out of its problems it seized the money of deposit holders with balances over 100,000 euros. The first 100,000 euros were protected by deposit insurance. Many countries offer this protection in order to promote financial stability and confidence and Cyprus is one of those countries. A total of 47.5 percent of all bank deposits above 100,000 euros were seized. The IMF declared this bail-in a success and during a G20 meeting in 2014, the majority of countries in attendance agreed that this was the way forward and would start to implement it so as to avoid the use of public funds to prop up private banks. I would recommend going onto Google and checking to see whether your country has legalized bail-ins. You may be surprised to find that it was done some time ago and for some inexplicable reason it did not receive much coverage in the press, or the news was so full of banking jargon that most readers lost interest after the first paragraph.

Regardless of where you live, all bail-in rules appear to have the same three ingredients. Firstly, the bank in question needs to be domestically important. If it is not domestically important, the regulation would require it to be acquired by a domestically important bank. Secondly, the bail-in does not affect those accounts that are protected by the deposit insurance mentioned above. In the United States, that deposit insurance is $250,000. In less developed economies, that threshold is considerably lower. This however comes with a major caveat. This deposit insurance is provided by insurance companies. In the case of a catastrophic banking crisis, it is unlikely these insurers will be able to make good on this insurance. The FDIC, which provides deposit insurance for US banks, declared in their 2021 annual report they had $120 billion in their deposit insurance account - this is a drop in the ocean compared to the $19 trillion in US bank deposits! The third rule is that you will be offered some alternative asset in exchange for the forfeited bank deposit. Now, before you get too excited about this if your bank goes bust, it is likely that the bank will offer you shares in it, and unless this bank can get its shot together, those shares are going to be worthless.

So what do you need to do in the face of all this negativity? I am not saying your bank is going to execute a bail-in tomorrow, but it is important to understand two things. Firstly, you need to understand that the money you have in the bank is no longer yours. You have effectively lent it to the bank. They are not holding it in some special safety deposit box with your name on it. As soon as you deposit your money into the bank, it goes out. It is lent to another bank customer, or it is used to underwrite some other financial transaction to which you are not a party. The bank balance you see every time you log into your bank account is nothing more than an IOU, and that is why legendary banker JP Morgan said “gold is money, and everything else is credit”. The money you think you hold in the account is not money - it is nothing more than an obligation the bank has to you and there will be times when the bank will not be able to repay the loan you gave them. Secondly, you need to understand that banks do fail. Hundreds of banks in the US failed in 2008 and 2009 during the financial crisis. Banks are not nearly as safe as you think they are.

This means you need to take control of your finances. You need to make sure you have control of your assets and you need to decrease your reliance on financial intermediaries such as banks. And herein lies one of the great beauties of Bitcoin - it is trustless. It does not require you to trust banks. It does not require you to trust central banks that print and debase money. It places financial responsibility on your shoulders, and with this responsibility, you enjoy complete and undiluted control of your wealth.

#bitcoinusa#cryptocurrencies#binary#bitcoinminning#forexlifestyle#investing#binaryoptions#bitcoincash#crypto#cryptotrading#bitcoin