Source: Lear Capital | RACHEL MILLS 

Are your accounts at the banks really secure? After the financial crises, there are laws on the books that make your accounts insecure from even the bank itself. This is a MAJOR threat to your retirement security and savings.

Bail-ins

Have you heard of bail-ins? The Bail-In can be demonstrated with one word: Cyprus. When Cypriot banks collapsed in 2012, a bank holiday was declared, the doors were locked, and access to money within was cut off. While the banks were closed, it was determined that creditors of the bank, not taxpayers, would fund its bailout. Hence the term “BAIL-IN”.

Future losses will now be borne by shareholders and investors of the bank exclusively. But you might be surprised to know that every depositor is now technically considered a “shareholder”. Did you think you were buying bank stock when you opened an account at the bank? Neither did the “creditors” of the Cypriot banks.

Cypriot bank creditors were to include shareholders, bond investors and get this – The Bank’s Own DEPOSITORS! In other words, depositors were suddenly considered to be “INVESTORS”. Basically, the unsecured debt, your deposits, got converted into bank equity so that recapitalization of the distressed institution could be swiftly achieved.

Presto chango! The bank’s liabilities suddenly became assets!

The “best” customers – the largest depositors – took the largest hit. In this day and age of class warfare, it was only politically feasible to put the lion’s share of the losses on the “rich”. Smaller depositors were kept whole, while depositors with over €100,000 in the Bank of Cyprus lost 40% of their money.

Could similar scenarios become more widespread? Can you count on the FDIC or SIPC insurance to save you in the event of a market catastrophe? Highly unlikely since these institutions are grossly underfunded. The FDIC only has $83 billion in reserves while total deposits are estimated at almost $12 trillion. So, the cracks in those dams are already becoming obvious and the repairmen are quickly developing their euphemistic contingency plan.

Cyprus pioneered the bail-in model that other central banks and governments seem to be looking toward. After Cyprus, the G20 leaders met in Brisbane Australia and ratified this template approach when future financial panics occur. And the International Monetary Fund published a discussion document (From Bail-out to Bail-in: Mandatory Debt Restructuring of Systemic Financial Institutions 5) which could be a harbinger of what’s to come.

Account Freezing: Redemption Gates

At all costs, big banks and brokerage firms can’t have disorderly liquidation of deposits so they need to find a way of preventing your money from leaving the institution or limiting your withdrawals. Have you heard of a “Redemption Gate” which was enacted by the SEC, an agency of the government? Basically, it’s a legal mechanism for banks to lock you out of your account for up to 10 days if the bank determines it is in their best interests:

Redemption Gates – Under the rules, if a money market fund’s level of weekly liquid assets falls below 30 percent, a money market fund’s board could, in its discretion, temporarily suspend redemptions (gate). To impose a gate, the board of directors would find that imposing a gate is in the money market fund’s best interests.

Read the SEC press release.

Is this the tip of the iceberg when it comes to freezing your account? They’ve already made it perfectly, explicitly legal to lock prime money market fund holders out of their accounts for a time. Will this be expanded in the future?

More and more, depositors are expected to suffer the consequences and bear the losses of the institutions in which they put their money. They could be locked out of their accounts should things go haywire again. Clearly, the financial community is preparing for something big.

It’s prudent to have some assets that are easily accessed and don’t rely on an intermediary like a financial institution to liquidate.