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Why Even Federally Insured Bank Deposits Are At Risk
See the newly updated list of the safest U.S. banks

By Bob Stokes
Tue, 19 Mar 2013 16:45:00 ET
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Financial headlines in recent months have given readers the impression that the European debt crisis was under control. 

But this week the public suddenly learned that the European Union proposed a levy on personal bank accounts in Cyprus as a precondition of a financial bailout. Without that EU lifeline, Cyprus faces a financial collapse.
 
But taxing the personal savings of Cypriots goes beyond austerity. Bank depositors in Cyprus are livid and worried. They wanted to withdraw their money from their bank accounts. Cyprus lawmakers did vote against the levy, which "set the country on a collision course with its European partners." (Wall Street Journal, March 19)
 
Even so, bank runs in Cyprus may be unavoidable. Depositors in the U.S. can't help but wonder whether bank runs could happen here.
 
A financial commentator said, "Unlike Cyprus, American depositors have the Federal Deposit Insurance Corporation. The FDIC insures deposits up to $250,000."
 
Well, consider Robert Prechter's take on the FDIC's $250,000 guarantee.
 
Actually, this guarantee just makes things far worse, for two reasons. First, it removes a major motivation for banks to be conservative with your money. Depositors feel safe, so who cares what’s going on behind closed doors? Second, did you know that most of the FDIC’s money comes from other banks? This funding scheme makes prudent banks pay to save the imprudent ones, imparting weak banks’ frailty to the strong ones. When the FDIC rescues weak banks by charging healthier ones higher “premiums,” overall bank deposits are depleted, causing the net loan-to-deposit ratio to rise. This result, in turn, means that in times of bank stress, it will take a progressively smaller percentage of depositors to cause unmanageable bank runs. If banks collapse in great enough quantity, the FDIC will be unable to rescue them all, and the more it charges surviving banks in “premiums,” the more banks it will endanger. Thus, this form of insurance compromises the entire system. Ultimately, the federal government guarantees the FDIC’s deposit insurance, which sounds like a sure thing. But if tax receipts fall, the government will be hard pressed to save a large number of banks with its own diminishing supply of capital.
 
Conquer the Crash, second edition, p. 177
 
And we all know that the federal government has suffered from falling tax receipts.
 
Prechter has also noted that the FDIC only has enough funds to insure the deposits of the nation's three largest banks. So if thousands of banks fail around the same time in a major financial crisis, most depositors will have to wait to be made whole.
 
Even during a time of severe financial upheaval, EWI believes some banks will succeed. Indeed, these healthy banks will become even stronger during a financial crisis because other depositors will consider them as places to do business.
 
The list of the safest U.S. banks provided in the second edition of Conquer the Crash has now been updated!
 
You can get this 10-page bank safety report for FREE by joining Club EWI. Membership is also free.
 
 

 

 

 

 

   


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