by Nick Giambruno, International Man:
It’s hard to think of a topic where following conventional wisdom is more dangerous.
That topic is banking.
The general public and most financial experts accept as absolute truth that putting your money in a domestic bank is safe and responsible. After all, the government insures your deposits, so if anything were to go wrong…
As a result, most people put more thought into the shoes they purchase than the bank they entrust with their life savings.
It’s a classic moral hazard. People are more likely to take risks when they don’t think they’ll bear the costs if and when something goes wrong. But, the truth is, if you make poor banking decisions, you may end up bearing some of the cost.
When you look at the facts, it becomes clear that choosing the right custodian for your life savings makes a difference—and it deserves some serious thought.
A False Sense of Security
In the US, the Federal Deposit Insurance Corporation (FDIC) insures bank deposits. When a bank fails, the FDIC pays depositors up to $250,000. The FDIC has a reserve of around $30 billion for this purpose.
Now, $30 billion is a lot of money. But, considering the FDIC insures around $9 trillion in deposits, $30 billion is just a drop in the bucket. It’s actually less than half a penny for every dollar it supposedly insures.
Over two dozen US banks have deposits larger than the FDIC’s $30 billion reserve. One large bank failure and the FDIC itself would go bust. And, with many big US banks leveraged to the hilt, that isn’t an outlandish possibility.
Oddly, these facts don’t seem to shake the confidence the general public and most financial experts place in the banking system.
To make matters worse, governments around the world have already established a dangerous precedent: Whenever a government deems it necessary, it simply disregards deposit guarantees.
This happened a few years back in Cyprus, in the early days of the country’s financial crisis. Initially, the Cypriot government tried to dip its hands into bank accounts under the guaranteed amount.
I’d bet this trend is only beginning. We haven’t even made it through the coming attractions.
Placing confidence in any banking system simply because of a bankrupt government’s promise is dangerous. Follow conventional wisdom at your own peril.
Fortunately, in this day and age, geography doesn’t need to limit where you bank. Banking outside of your home country—where you can find much sounder governments, banking systems, and banks—is, in most ways, just as easy as banking with Bank of America.
Setting up a bank account outside of your home country protects you from capital controls, lightning government seizures, bail-ins, other forms of confiscation, and any number of dirty government tricks.
In short, your savings in a foreign bank are largely safe from any madness in your home country.
Offshore banks offer another benefit: They are usually much safer and more conservatively run than banks in your home country… at least if you live in the US and many parts of Europe.
It’s hard to see any downside to placing some of your cash where it’s treated best. In the event your home government does something desperate or your domestic bank makes a losing bet, it could save you from financial ruin.
A few years ago, Doug Casey and I visited Cyprus in the wake of their banking collapse. We met with a number of astute Cypriots who saw the writing on the wall. They moved their money to safe foreign banks outside of the country before the bail-in and capital controls. It saved them from the harmful effects. We can learn a lot from their example.
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