Awake-in-3D: Why your Bank Deposits can be Legally Confiscated
Why Your Bank Deposits can be Legally Confiscated
On December 14, 2023
By Awake-In-3D
Read the separate introduction to this article here
The Historical Context of Banking Regulations
In the records of American financial history, the westward expansion of banking institutions played a pivotal role, mirroring the expansion of railroads, land settlements, and the burgeoning farm mortgage market.
As banks extended their reach, so did the growth of bank shareholding, setting the stage for a dynamic interplay between financial institutions and the broader economic landscape.
Impact of the 1929 Stock Market Crash and the Creation of Bank Deposit Insurance
The results of the 1929 stock market crash reverberated through the foundations of the banking sector, triggering bank runs and failures that exposed a growing number of average Americans to the double liability consequences.
It was amidst the chaos of the Great Depression that the New Deal under President Roosevelt introduced a groundbreaking solution — deposit insurance. This provision aimed to make depositors whole in the face of banking failures, signaling a shift in the characteristics of the depositor-bank relationship.
In the aftermath of the stock market crash, the concept of deposit insurance gained traction, offering a safety net for depositors.
The FDIC (Federal Deposit Insurance Corporation) was established in 1933 as a government agency funded by premiums paid by private banks.
Dual Shareholder Liability and the Shift to Deposit Insurance
Before the founding of the Federal Reserve System in 1913, senior bank managers of national banks were also major shareholders of their bank and therefore held personally liable for net losses in the event of a bank’s failure.
Meaning, bank managers had to liquidate their holdings to pay back depositors if the bank failed.
This mechanism of dual shareholder liability served as a robust mechanism to ensure prudent banking practices.
However, as the 20th century progressed, the landscape changed, and the focus shifted toward a reliance on deposit insurance, rather than dual shareholder liability.
This reduced the responsibility and influence of shareholders to proactively monitor their bank’s financial stability.
Basically, the adoption of Deposit Insurance created a moral hazard where shareholders of banks were no longer held responsible for paying back depositors with their money if the bank failed.
You Do Not Legally Own the Funds Deposited at Your Bank
The relationship between depositors and banks was established by a traditional legal framework surrounding deposit ownership.
It used to be that once funds are deposited into a bank, the legal ownership shifts, and depositors effectively hold unsecured IOUs. This meant that depositors were deemed as Creditors of the bank.
Traditionally, this arrangement implied that banks were obligated to repay Creditor funds in cash upon demand, providing a sense of security for depositors.
But not any longer.
The traditional understanding of the depositor-bank relationship comes under scrutiny within the fine print of an FDIC-BOE joint paper. This plan, dated December 10, 2012, proposed a paradigm shift — converting these unsecured IOUs into “bank equity.”
In essence, depositors would no longer be Creditors holding claims to their funds; instead, they would become stockholders in the bank, with the fate of their “investments” (deposits) tied to the bank’s performance.
When looking into the details of the FDIC-BOE joint paper, titled “Resolving Globally Active, Systemically Important, Financial Institutions,” the plan outlines an efficient path for returning a failing bank to the private sector, emphasizing the conversion of depositor debt into equity as a crucial step in this process.
The Cypress Banking Crisis was a Test for the New Bail-in Process
To better understand the full implications of the FDIC-BOE directive, we can look back at what happened to depositors during the Cypress bank crisis in 2013.
The confiscation of bank customer deposits to bail out failing banks (called a bail-in) was not a one-off incident. It proved to be part of a broader strategy rooted in international initiatives originating from the G20 Financial Stability Board in Basel, Switzerland. Cypress banks were the perfect testing ground.
The FDIC-BOE Directive and Global Initiatives
The core of the Bail-In initiative lies within the 2012 FDIC-BOE joint paper titled “Resolving Globally Active, Systemically Important, Financial Institutions.”
This comprehensive document reveals a carefully crafted plan to address the fallout of a financial institution’s failure, emphasizing the need for a controlled resolution to avoid systemic disruptions and the utilization of public funds.
The pivotal element of this plan is the conversion of depositor debt into equity, altering the traditional dynamics of banking relationships.Connections between the FDIC-BOE and the G20 Financial Stability Board (The Elite Central Planners)
Tracing the roots of the FDIC-BOE directive takes us back to the G20 Financial Stability Board in Basel, Switzerland. The global nature of these initiatives signifies a coordinated effort to establish a framework for handling failing financial institutions on an international scale. Understanding these origins provides context to the broader implications and suggests a shared approach among major economies.
The shockwaves from the Cyprus banking crisis and the subsequent confiscation of customer deposits serve as a stark reminder that the FDIC-BOE directive is not an isolated strategy.
A broader examination of global initiatives reveals similar directives in New Zealand, highlighting an international trend towards bail-ins as a mechanism to stabilize failing financial institutions. The interconnectedness of these strategies underscores the need for a unified approach in addressing systemic risks.
Here’s the Kicker: The FDIC Insures Bank Deposits but NOT Funds Determined to Be Bank Equity
One notable aspect of the FDIC-BOE directive is the absence of explicit mention regarding the protection of “insured deposits” in the United States. This omission raises questions about the safety of deposits traditionally covered by FDIC insurance, leaving depositors uncertain about the security of their funds in the event of a financial institution’s failure.
The primary risk (and significant cause for concern for your bank deposits) pertains to the potential transformation of depositor funds into bank equity through the FDIC-BOE directive, a component of the Dodd-Frank Act. This conversion, termed “statutory bail-ins,” must be understood regarding the security of depositor funds and their coverage under FDIC insurance.
The simple takeaway:
- Your Deposits Become Bank Equity: Traditionally, depositor funds are legally considered assets of the bank as soon as they are deposited. The FDIC-BOE directive introduces the possibility of converting depositor IOUs into bank equity, fundamentally altering the nature of the depositor’s claim on the bank.
- Your Potential Loss of FDIC Protection: If depositor IOUs are converted into bank equity, they lose their status as insured deposits, putting them at risk of being wiped out in the event of a financial institution’s failure. This is a departure from the traditional understanding that insured deposits (typically up to $250,000) are protected by FDIC insurance.
- The Systemic Risks: The shift from secured depositors to unsecured stockholders introduces systemic risks, potentially exposing depositors to losses akin to those experienced by Lehman Brothers shareholders during the 2008 financial crisis.
In essence, the risk lies in the legal and systemic shift that could render depositor funds vulnerable to losses, challenging the conventional understanding of FDIC-insured deposits as a safe haven for cash.
Summarizing the Significant Risks and Concerns for Bank Depositors
The Legal Shift: From Secured Depositors to Unsecured Stockholders
The FDIC-BOE directive represents a significant legal shift for depositors. Once holders of secured deposits with a legal right to demand cash, we may find our deposits transformed into bank equity and we become unsecured stockholders, subject to the market’s uncertainties. This shift challenges the traditional perception of deposits as a secure form of holding wealth.
Implications for Insured Deposits: No FDIC Safety Net
The lack of explicit mention for “insured deposits” in the FDIC-BOE directive introduces uncertainty for depositors who have relied on FDIC insurance to safeguard their funds. The traditional safety net provided by deposit insurance may no longer extend to cover the potential conversion of these deposits into bank equity, exposing insured depositors to unforeseen risks.
The Domino Effect of One Major Bank Failure Spreading Across the Financial System
Beyond individual depositors, the broader systemic risks associated with the FDIC-BOE directive become clear. The interconnected nature of financial institutions means that the repercussions of a single bank’s failure, coupled with the conversion of depositor funds into equity, could trigger a domino effect, impacting the stability of the entire financial system.
Supporting references:
- Brief Summary of the Dodd-Frank Wall Street Reform and Consumer Protection Act, United States Senate Committee on Banking, Housing and Urban Affairs http://www.banking.senate.gov/public/_files/070110_Dodd_Frank_Wall_Street_Reform_comprehensive_summary_Final.pdf
- Basel III International Reforms, Committee on Banking Supervision, Bank for International Settlements, Revised June 2011 http://www.bis.org/publ/bcbs189.pdf
- Liquidity Risk Monitoring, January 2013, http://www.bis.org/publ/bcbs238.pdf
- On Title II of the Dodd-Frank Act, American bankers Association, Copyright 2010, 1120, Connecticut Avenue Washington D.C. 20036, http://www.aba.com/aba/documents/RegReform/TItleIISummary.pdf
- Debt and (not much) Deleveraging, by McKinsey & Company, February 2015 http://www.mckinsey.com/insights/economic_studies/debt_and_not_much_deleveraging
- “Shareholder Liability: A New (Old) Way of Thinking about Financial Regulation,” The C.D. Howe Institute, Commentary No. 401, February 2014, by Finn Poschmann. Search for Commentary 401.pdf at http://www.cdhowe.org
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