Is Your Bank Account Safe?

March 24, 2013

Got Cash?

Ellen Brown at the excellent “Web of Debt” Blog has revealed startling information about our personal savings accounts.
As many readers may know, the small Island nation of Cyprus may or may not begin “taxing” the savings accounts of depositers in an effort to comply with European Union austerity demands. Up to 10% of individual bank deposits could be confiscated.

Brown writes:
“A Safe and a Shotgun or Publicly-owned Banks? The Battle of Cyprus”
Posted on March 21, 2013 by Ellen Brown
If these worries become really serious, . . . [s]mall savers will take their money out of banks and resort to household safes and a shotgun.

– Martin Hutchinson on the attempted EU raid on deposits in Cyprus banks

The deposit confiscation scheme has long been in the making. US depositors could be next . . .

“In a September 2011 article in the Bulletin of the Reserve Bank of New Zealand titled “A Primer on Open Bank Resolution,” Kevin Hoskin and Ian Woolford discussed a very similar haircut plan that had been in the works, they said, since the 1997 Asian financial crisis. The article referenced recommendations made in 2010 and 2011 by the Basel Committee of the Bank for International Settlements, the “central bankers’ central bank” in Switzerland.

The purpose of the plan, called the Open Bank Resolution (OBR) , is to deal with bank failures when they have become so expensive that governments are no longer willing to bail out the lenders. The authors wrote that the primary objectives of OBR are to:

•ensure that, as far as possible, any losses are ultimately borne by the bank’s shareholders and creditors . . . .
The spectrum of “creditors” is defined to include depositors:

At one end of the spectrum, there are large international financial institutions that invest in debt issued by the bank (commonly referred to as wholesale funding). At the other end of the spectrum, are customers with cheque and savings accounts and term deposits.

Most people would be surprised to learn that they are legally considered “creditors” of their banks rather than customers who have trusted the bank with their money for safekeeping, but that seems to be the case. According to Wikipedia:

In most legal systems, . . . the funds deposited are no longer the property of the customer. The funds become the property of the bank, and the customer in turn receives an asset called a deposit account (a checking or savings account). That deposit account is a liability of the bank on the bank’s books and on its balance sheet. Because the bank is authorized by law to make loans up to a multiple of its reserves, the bank’s reserves on hand to satisfy payment of deposit liabilities amounts to only a fraction of the total which the bank is obligated to pay in satisfaction of its demand deposits.

The bank gets the money. The depositor becomes only a creditor with an IOU. The bank is not required to keep the deposits available for withdrawal but can lend them out, keeping only a “fraction” on reserve, following accepted fractional reserve banking principles. When too many creditors come for their money at once, the result can be a run on the banks and bank failure.

The New Zealand OBR said the creditors had all enjoyed a return on their investments and had freely accepted the risk, but most people would be surprised to learn that too. What return do you get from a bank on a deposit account these days? And isn’t your deposit protected against risk by FDIC deposit insurance?

Not anymore, apparently. As Martin Hutchinson observed in Money Morning, “if governments can just seize deposits by means of a ‘tax’ then deposit insurance is worth absolutely zippo.”
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She goes on to suggest that publicly-owned banks could be the only solution to save the global banking system. For instance, the Bank of North Dakota is the only state-owned bank in the U.S.
It creates it’s own credit and largely avoided the disastrous bank crash of 2008. Brown also points out that the countries termed “BRIC” (Brazil, Russia, India and China) all have state-owned banks and rebounded from the global meltdown much faster than Western capitalist banks.
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And speaking of capitalism, check out this really, really good piece at “Cannonfire” about the difference between Industrial capitalism, which creates and innovates, and “renter” capitalism which just pushes money into dark corners.
This one will really make you think…

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