With recent news predictions of another upcoming banking crisis like the last one (in 2008), remedies are in place to prevent taxpayers from having to bail out the banks again. Unfortunately, though, large banks on Wall Street can use depositor funds to bail themselves out internally. This bail-in approach is in part due to the Dodd-Frank Wall Street Reform and Consumer Protection Act. This act was put in place in response to the 2008 financial crisis, passed in 2010 by the Obama administration. It includes provisions such that if you hold money in checking or savings accounts at a particular bank that happens to collapse, your funds may legally be frozen and confiscated to retain the bank’s financial solvency.
In other words, rather than rely on taxpayer money to prevent bankruptcy, the bank can depend on your accounts for stability. Then, as compensation, the bank exchanges your money for company shares in the same value. This may not seem ethical, but in fact, THIS IS NOW LEGAL! Consider a banking institution that takes on too many risks and faces bankruptcy. If the economy takes a nose-dive, the simple truth is this bank now can confiscate your funds to save itself. This may not seem like an ethical process, but the Dodd-Frank Act legalizes what is called the Orderly Liquidation Authority (OLA). See Dodd-Frank: Title II – Orderly Liquidation Authority.
When you establish checking and savings accounts, your deposits to fund these accounts is money that mostly belongs to the bank legally. You may be asking, “Who owns my money?” The answer is that you own an IOU issued in the bank’s name. The bank considers your money as an unsecured debt, and Dodd-Frank language says your derivatives, or high-leverage assets, are more important than your income accounts when they need to pay off their debts.
Your deposits are essentially secondary to counter-parties for these derivatives. It is possible the Federal Deposit Insurance Corporation (FDIC) may be able to help you, but their billions in assets are overshadowed by outstanding derivative values in the trillions. Deposits are generally protected via insurance limits as high as $250,000, but this is only in the case that the FDIC has the funds to cover all their account holders’ deposit claims. This could be huge.
Take some of the major banks that have integrated financial securities (derivatives) with deposits. Many of these institutions have deposits that go over one trillion dollars. With outstanding derivatives of vast amounts in a situation where the banks become insolvent, bail-ins would be imminent. With the Dodd-Frank Act in place, the banking system is allowed to freeze funds and take up to 50% or more or your direct funds as was the case in the Republic of Cyprus financial crisis of 2012. This was an effort to save the bank.
The fact is, any money you store in a banking institution now becomes an unsecured debt, and you become an unsecured creditor that is called on to share in the burden of a bank loss. You have little- to-no legal recourse.
You may have invested with a secure institution in which you’ve been guaranteed the survival of the bank even in financial crisis, but banks are likely to help pay for the recuperation of other failing banks. It is highly likely that banks will not absorb associated costs but rather pass them to customers. Consider that the low and middle class will likely be affected the most by the Orderly Liquidation Authority. Since the wealthy hold most of their money in debt securities, precious metals, equities, and real estate, the impact may not be as high. Low and middle class tend to hold their money in checking and savings accounts, placing them in a vulnerable position. Even a bank safety deposit box is not secure. The Dodd-Frank
Act gives the right for banks to confiscate those funds in and use them as needed. Retirees who receive a pension are subject to this confiscation of funds as well. As a pension-receiving retiree depending on checking and savings account funds, you could find yourself in a vulnerable position.
One asset that banks cannot touch includes your reserve of precious metals, generally in the form of gold or silver. One advantage of precious metals is they are safe havens against economic crises and inflation. You would need to store these assets privately, so they are not subject to confiscation and/or conversion. In the event of a banking crisis similar to that of 2008, you can protect some of your assets if you convert them to gold and silver in a private storage scenario. A tangible asset you can touch may provide peace of mind over the money you never actually see.