DID YOU KNOW?
The Bank Doesn’t Have Your Money
In our Did You Know? blogs we provide readers with useful information that is generally not widely realized by inexperienced investors. In this edition we will discuss the concept that your bank or financial institution may not physically possess your money that is reflected on your statement.
That’s right! Despite the common belief and assumption that your deposited and saved money is liquid and available at your financial institution, that is often NOT the case.
A little-known system called “Fractional Reserve Banking,” set by the Federal Reserve, requires banks to hold only a certain percentage of customer deposits “on hand.” The remainder of your (our) money is utilized as one of the many avenues to actually make money for the bank! The way it works is the bank takes in customer deposits, which is immediately added to their asset balance sheet. They are then allowed to use those funds to lend out in the form of loans, for mortgages, cars, business, and other personal matters. The bank then pays the customer a very small amount (currently about 0.2%) in interest, while they collect much more with these loan origination terms. Most banks also engage in “overnight lending” to other banks to make quick profits – with your money! As a result, these “derivatives” can become increasingly dangerous when negative economic conditions create an increasing number of loan “defaults”, as it the customer’s money that is being lost. In bad economic times, or when there is a rumor that a bank may be in financial trouble, it can cause what is known as a “bank run,” which occurs when large numbers of customers attempt to withdraw their funds at the same time, which has occurred in the past. Normally, up to $250,000 per customer is “insured” by the FDIC, however that is not as guaranteed as it sounds.
Of course, banks need to make money, or how would they have the ability to pay interest? However, the most surprising part of this is the fact that prior to the pandemic in 2020, they were only required to keep 10% of deposited funds liquid. That rule was changed in March of 2020, and they are now required to hold 0% (that is not a misprint) of depositor’s money. This clearly creates a situation where a banks structure can be very fragile, and some have failed in the past. Depositor funds were frozen, and took years to recover, if ever at all.
A common solution to “save” the bank were known as “bail-outs,” when the Federal Reserve itself (an external party) lent or printed money to provide the banks with liquidity, essentially making them unaccountable for bad loans, risky investments, and even greed, while the hard-working individual may have lost some, or all, of their money. This process also caused inflation, as it lessened the value of the money itself.
Worse, there is another little-known process that has been since been created, known as the “bail-in,” which allows for a portion of depositor money to awarded to the bank directly. A “bail-n” literally cancels the financial institution’s debt owed to a creditor, or depositor (internal party), essentially “stealing” money they have been entrusted with. Although it is presented as a better alternative to insolvency, the customer suffers at least a partial loss of their funds. The original rule is that only funds above and beyond the insured $250,000 are at risk, but that could change at any time, depending on the severity of the crisis.
As discussed in our publication, When to Buy and When to Sell: Combining Easy Indicators, Charts, and Financial Astrology (available on Amazon), and in previous blogs, it is wise to take precautions, and diversify into various assets, or at least keep funds in more than one financial institution, including keeping cash in a safe place.
***As always, this information is not intended to be financial advice, or any specific buy or sell recommendation, but rather a guide to assist the reader in some further understanding of the financial markets.
