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Protect Your Cash from Bank Runs
Global Financial System Teeters Dangerously on Edge of Stability

excerpted from an article by Lee Bellinger

Financial turmoil in Southern Europe is raising the spectre of bank runs that could spread globally. You've probably heard this before, but today's Executive Bulletin explains how the contagion branches out and what you can do to protect yourself.

As NPR reports, "There's a slow-motion bank run happening in Europe, as depositors move their money from financially troubled countries like Greece and Spain to stronger countries like Germany."

"Banks take depositors' money and lend it out. So even a strong bank is in trouble if all the depositors suddenly decide to pull their money out. A full-blown run can sink a bank in an afternoon."

Banks that practice fractional-reserve lending – which, today, means virtually all banks – are inherently vulnerable to bank runs. Even the strongest, soundest banks are unable to honor a sudden spike in demand withdrawals. In theory, some banks could perhaps pay out 5 cents to as much as 10 cents on the dollar, but in practice the margin of error is much narrower for most banks, which lack actual cash reserves and must borrow to cover daily needs.

If an abnormally large portion of depositors walked into banks one day and demanded their money, banks would quickly freeze up. The whole system is latently insolvent.

Fractional-Reserve Euro Banking Multiplies Risk

The system rests on confidence. The European Central Bank has sought to restore confidence in the system by making massive emergency loans to banks to keep them from going under and avert a direct public perception of a systemic problem. More debt to solve the problems created by too much debt.

But the mega-banks are so heavily leveraged that if a relatively small portion of one bank's derivative book blew up, for example, it could be enough to collapse the entire system. The amount of risky derivatives exposure in the banking system could ultimately prove "too big to bail" (out): Goldman Sachs is exposed to $44.2 trillion in derivatives; Bank of America, $50.1 trillion; Citibank, $52.1 trillion; JP Morgan Chase, an astounding $70.2 trillion in derivatives – roughly equal to total world GDP! In the United States, Federal Reserve backstopping and FDIC insurance have served to keep bank depositors mostly complacent and prevent a mass-psychological trigger for bank runs.

The FDIC, with about $19 billion in cash, is ill-equipped to mop up the mess created by the failure of a mega-bank, let alone a domino effect of successive bank failures, even though it does enjoy a line of credit with the U.S. Treasury. More debt to solve the problems created by too much debt is no long-term solution. The Federal Reserve has already tripled the size of its balance sheet – from about 6% of GDP before the 2008 financial crisis to 17% of GDP today.

What You Can and Should Do: Know Your FDIC Coverage Limits

When Congress hiked FDIC coverage limits from $100,000 to $250,000 per account following the 2008 mortgage meltdown, it did temporarily help quell depositor fears and keep capital from fleeing the banks. The $250,000 FDIC coverage limit is slated to revert back to $100,000 at the end of 2013. If that happens – or perhaps well in advance of that happening – large numbers of people with more than $100,000 on deposit could take their money and run.

It is not advisable to exceed FDIC limits on any account at any bank – no matter how safe it may appear. The safest banks today are only "safe" under normal conditions. No bank whose outstanding liabilities to depositors are multiples of its actual assets, as is the nature of fractional reserve banking, is impervious to bank runs.

Although FDIC insurance only covers up to $250,000 in deposits per individual account, an individual can open multiple $250,000 accounts at different banks in order to get Federal Deposit Insurance on each of them. Consider also that since joint accounts cover two depositors, you can effectively get $400,000 worth of coverage on such an account (the FDIC's current coverage limits, which expire on January 1, 2014, extend $200,000 worth of coverage per co-owner of a joint account).                                                                                                    Thanks, Lee! Remember, the FDIC’s $250,000 amount is temporary. Until 2008, the cap was $100,000. Unless the President signs new legislation, the cap will return to $100,000 on Jan. 1, 2014.

Credit unions do not use FDIC. There’s another entity (NCUSIF) that does insure their deposits up to $250k and, that limit too, will expire on December 31, 2013.


Something else you should understand is that the FDIC only insures up to $250,000 per depositor, not per account. If you have four bank accounts each with $250,000 in them, you don’t get $1 million from the FDIC — you get $250,000. Credit unions do not use FDIC. There’s another entity (NCUSIF) that does insure their deposits up to $250k and, that limit too, will expire on December 31, 2013. Bear in mind, 130 banks have failed this year. That’s 5x the number that failed in 2008.

I expect Congress would do everything in its power to the keep the FDIC well-funded, especially during an emergency, wouldn't you? Nevertheless, I can also think of a few scenarios or terrible circumstances under which their ability could be taken away. For example:

1. If the banking crisis came at the same time as an interest rate spike and general funding emergency

2. If we were at war with Iran and things were not going well 

3. If China suddenly started dumping their Treasury holdings in the opening gambit of an economic war 

These, and other catastrophes, would all be times under which I could easily imagine a less-than-adequate response from Congress in regard to FDIC "protection " - another reason every one of us should be taking steps AWAY from the Almighty Dollar and governmental confidence where personal welfare is concerned.

Personally, I recommend Gold bullion rare coins and grain for wealth storage, and Karatbars gold and junk silver for day-to-day living. Also, become a barterer. Interested? Just ask. Write me at miketummillo@me.com. You do NOT want to be caught flat-footed if/when a day of reckoning takes place. Those who've experience hyper-inflation say it happened like lightning, without warning. Prepare TODAY!

Every blessing,

Michael Tummillo