Even in New Age Bank Deposit Safety Risk – Gold & Silver Retain Safety

Category: Banking sector | Gold Trading | Silver Trading April 8, 2013 | Comments Off Share
Even in New Age Bank Deposit Safety Risk - Gold & Silver Retain Safety

Even in New Age Bank Deposit Safety Risk - Gold & Silver Retain Safety

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 FDIC’s 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 deposits.

Deposit 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 institution’s creditworthiness, and not just whether or not the institution was FDIC insured?

The traditional 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.

Nevertheless, depositors have typically been negatively affected when banks become insolvent. As Eurogroup President Jeroen Dijsselbloem recently pointed out, this seems to be part of the nature of banking, i.e. to pass a bank’s losses on to both their shareholders and those who entrusted them with deposits.

Liquidity 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.

Traditionally, 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.

What Do You Think?

Any thoughts about this? Share it!

 

Courtesy: Dr. Jeffrey Lewis


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