Summary : Can a bank in the US seize your deposits?
Recent financial events on the small island nation of Cyprus sent reverberations across the globe. The European Union planned to finance a portion of the bailout with a tax on bank deposits. The precedent has been set and for the first time in modern history, ordinary bank depositors’ funds are fair game to pay for bank mismanagement. In fact, developments across the globe indicate an international shift by national governments to write regulations that permit deposit confiscation in the case of bank failure. The question is, could this happen even in the United States?
In December 2012, the U.S. Federal Deposit Insurance Corporation (FDIC) and the Bank of England (BOE) released a paper proposing a radical plan for U.S. financial institutions. In essence, under the proposed plan and in certain circumstances, money deposited in a bank converts to “bank equity.” Standard FDIC insurance, which currently covers deposits up to $250,000, would take a back seat to the joint FDIC-BOE plan and deposits would convert to “shares” in a failing bank. Depositors could access their shares, but there is no guarantee of cash availability.
Additional reports from across the globe cite New Zealand as another country actively considering such drastic plans. The Green Party of New Zealand recently pointed out that government interests are pushing a Cyprus-style solution to bank failure that could pressure average bank depositors to forfeit some of their savings to fund big bank bailouts. New Zealand calls this system of managing bank failure Open Bank Resolution (OBR). Under OBR, customers will be able to gain at least partial access to their accounts and shareholders will bear the initial losses. However, under the plan, a portion of depositors’ funds freeze to cover additional losses. In essence, this is a tax on insured funds to pay for bank mismanagement and risky behavior.
Back in the United States, the joint FDIC-BOE plan is not current legislation and, therefore, not law. However, the discussion has begun and the risk to the average bank depositor could be huge. Banks use depositors’ funds to fuel risky investment behavior. In turn, these plans put the onus of covering bank failures on the backs of those persons trusting their money to the banks in the first place. Again, while these plans are in their infancy, it is critical to stay aware of how and where you hold your savings. The banking industry and government officials want to control access to your money and may place additional pressure on the deposits to cover a banks risky behaviors.