It’s a question we’ve gotten a lot, especially since the collapse of Silicon Valley Bank and First Republic Bank this past spring. So how do you protect against bank bail ins? We’ll explore that in today’s piece.
What is a bank bail-in exactly?
The concept became mainstream in 2013 thanks to a 2013 banking collapse in Cyprus.
The crisis began when it became obvious that Cypriot banks, particularly the two largest ones — Bank of Cyprus and Cyprus Popular Bank (also known as Laiki Bank, the Greek word for “popular”) — were heavily exposed to Greek government bonds. These bonds dropped greatly in value due to the Greek debt crisis of the time, leading to huge losses for the banks.
The European Union and the International Monetary Fund offered to help but only if Cyprus “bailed-in” the banks. That meant roping in the banks’ shareholders, bondholders and even some depositors.
Under the terms of the bail-in, Bank of Cyprus went through a significant restructuring. Shareholders and bondholders suffered losses, and the bank’s uninsured deposits over €100,000 were also subject to a haircut, resulting in a loss of funds for some depositors. The bank’s healthy assets were transferred to a newly created entity, while the remaining assets were placed in a “bad bank.”
Cyprus Popular Bank was also wound down and its healthy assets were transferred to Bank of Cyprus. Uninsured depositors and bondholders faced substantial losses, with some losing almost all of their investments.
At the time, this was highly controversial as it effectively confiscated depositors’ assets and opted them into an agreement they had no say over. It caused a lot of chaos and led to a loss of confidence in the banking system.
What happens in a bank bail in?
Basically, if a bank goes bust for whatever reason… and the government decides not to bail it out, as the bank’s customer, you could be forced to have your deposits converted into worthless bank stock.
As in the case of the Cyprus banks, it’s usually a last-ditch effort to keep the bank afloat. However, it’s very unfair because it forces depositors to become investors (at least, those with balances over a certain threshold.) Although they didn’t sign up for that, they’re forced to invest in a bank that’s not worth anything. It’s a “legal” form of theft.
The Almost Bank bail-in of 2023
The 2023 bank collapse of numerous US Banks including Silicon Valley Bank (SVB), Signature Bank, and First Republic, was a significant event that almost resulted in the first real bail-in within the US. It directly impacted the technology industry but also the wider financial system.
At the time Silicon Valley Bank failed, it was the 16th largest bank in the U.S. by total assets. It financed nearly half of U.S. venture capital-backed healthcare and technology companies, including well-known companies like Airbnb, Cisco, Fitbit, Pinterest, and Block Inc.
SVB collapsed for a number of reasons. But perhaps the biggest factor was the fastest rise in interest rates in decades. The bank held a lot of long-term bonds as reserves. As the interest rates went up, the value of those bonds went down. This hurt profits but also created a huge hole in the balance sheet.
That would have been fine so long as depositors didn’t want their money back. Of course, they did. As they did, the bank was forced to sell these bonds, locking in the loss.
As the news spread like wildfire on social media, more depositors pulled out their money. $42 billion in less than 24 hours.
Bank failures happen of course. And while this one was notable for the speed at which it happened, it was almost the first time a US bank became a bail-in.
Indeed, it looked like the federal government was going to let that happen. But politics got involved and the Feds eventually did step in to help.
Are bank bail-ins legal in the US?
You’re probably wondering if bank bail-ins are legal in the US. Yes, they are.
Passed in 2010, the Dodd-Frank Act, made this possible as part of its strategy to prevent a repeat of the 2008 financial crisis. This legislation gave the Federal Deposit Insurance Corporation (FDIC) the authority to convert a failing bank’s debts into equity – effectively turning creditors into shareholders.
The goal was to limit the chance the government would have to bail-out large banks if they fail.
What does the FDIC do in a bank bail-in scenario?
The FDIC’s job is to insure your funds up to $250,000 per account. But in the case of a bank bail-in scenario, that may or may not happen. You could still be forced into a bail-in scenario.
That said, we don’t think that’s likely, simply because the politicians in Washington want to get voted in again. And stealing voter’s money isn’t a good way to do that.
More likely, if there is a bail-in, savings of less than $250,000 would be protected. Any amount over that might not be.
7 ways to avoid a bank bail-in
So now we come to the most important part of this piece – how to protect yourself against a bank bail-in. Here’s what we’ve been recommending to our clients…
#1: Don’t keep more than $250,000 in any one bank.
FDIC insurance protects the first $250,000 in an account. That means that if you have two accounts, you’re insured for $500,000. Three accounts mean $750,000, and so on.
We also recommend clients keep their accounts in different banks. That way, if any one bank does fail and you’re forced to wait for an insurance payout (however that might happen), you still have access to most of your savings.
#2: Work with “too big to fail” banks
We are personally not fans of banks that are big enough to destabilize the banking system. But it’s also hard to argue with the political clout that brings.
For that reason, too big to fail banks tend to be relatively safer than smaller banks. They can also handle larger capital outflows. And if they do get into trouble, they are the ones most likely to get help from Uncle Sam.
#3: Keep track of the financial health of your bank.
No matter what bank you work with, keep tabs on its financial health. There are a number of services to help with that including Weiss Ratings and Veribanc.
A bank’s annual report will also give you a sense of how likely it is to need a bank bail-in at some point. The key metric to watch for is the Tier-1 capital ratio which answers the question: If the bank gets in real trouble and needs to liquidate assets, how much could they turn to cash in a very short period of time.
The higher this ratio, the more trouble the bank can absorb without going bust.
#4: Keep on top of the financial system in general.
It’s generally a good idea to keep on top of the financial media in general. Old school media can be useful but social media plays a part too. Indeed, it was a posting on social media that ultimately triggered the bank run that killed Silicon Valley Bank.
#5: Keep some cash out of the system
Don’t trust the banking system entirely. Instead, keep some cash on hand. We recommend clients keep three months’ supply of regular expenses close by.
If that’s not an option, then consider a safety deposit box at your local bank. Assets held within the box are not part of the bank’s balance sheet and so can’t be seized in the event of a bank failure. (In theory, anyway.)
Better yet, find a private vault that offers safe deposit boxes completely outside the banking system.
#6: Invest in things locally that keep value
That might be gold or other precious metals. But it could be other things you would buy anyway that don’t go bad.
Not only is it a useful way to protect your savings, but it’s a handy way to beat inflation.
#7: Buy Treasuries Direct
Funny enough, for all the noise about making banking safer, the federal government has a program that is causing banks to become less stable.
It’s called Treasury Direct and it lets you invest in US Treasury securities online. They are as safe as it gets – Treasury bills, notes, and bonds backed by the “full faith and credit” of the US Government. You can invest for as little as 28 days. And you earn much higher interest rate than you can get from a bank.
Need some help in this area?
Schedule a free no-obligation consultation with a Nestmann Associate to see if our four decades of wealth preservation experience can help you protect against bail-ins and help you build a wealth protection plan that fits your needs.
