- Many big financial companies were deemed “too big to fail” during the 2008 financial crisis. This led to $700 billion in government bank bailouts at taxpayer expense.
- The 2010 Dodd-Frank Act created the framework for bank bail-ins.
- In a bail-in, a bank can take money from their depositors and bondholders to raise capital requirements and keep the bank afloat.
Bank failures – both big and small – are more common that you think. There were 566 bank failures from 2001 through 2024, according to the FDIC.
It begs the questions, just how safe is your money in the bank?
While government bank bail-outs were common in the past, policymakers are now turning to a new tactic called the “bail-in,” which allows banks to tap depositor’s funds to increase their capital requirements in a crisis.
What’s the difference: a bail-out vs. a bail-in?
In a bail-out, the government gives money to banks to allow them to continue operations. During the 2008 global financial crisis, the U.S. government bailed out financial firms deemed “too big to fail” like Bank of America, Citigroup and AIG, using a whopping $700 billion of taxpayer dollars.
A bail-in is the opposite. Instead of using taxpayer money, the banks can seize money from their depositors and bondholders to raise capital requirements and keep the bank afloat.
The key difference is who is responsible to keep the bank doors open. Is it the government—using taxpayer money? Or is it the bank—relying on “unsecured creditors,” aka: depositor’s money held in the bank.
Are bank bail-ins legal in the U.S.?
Yes. In 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Act, which created legal provisions for bank bail-ins. As part of that legislation, bank depositors are named “unsecured creditors,” meaning their money can be seized to increase a bank’s capital requirements. The goal? To limit the responsibility of the government to bail-out large banks if they fail.
What happened during the 2023 banking crisis?
In March 2023, Americans watched as panicked Silicon Valley Bank depositors rushed to pull their money out of the failing bank. Within 48 hours, Silicon Valley Bank collapsed, marking the second largest bank failure in U.S. history. Soon after, four other U.S. banks went under in a mini-banking crisis for a total of five U.S. banks failures in 2023.
While we didn’t see bank bail-ins happen in 2023, the use of this tactic is being debated for use in the future.
Here’s what the Yale School of Management July 2023 research paper said about the 2023 bank failures: “The FDIC could have saved $13.6 billion in the recent failures of three large banks if regulators had earlier held the banks to the total loss-absorbing capacity”
The tide is turning. And, banks may be forced to do to bail-ins if they face financial trouble ahead.
How you can avoid becoming a victim of the next bank failure.
- Don’t put more than $250,000 in any one bank. FDIC insurance protects the first $250,000 in an account. So, spread your money around between different banks.
- Monitor your bank’s financial situation. If a bank is publicly traded, review the bank’s financial statements on the investor’s relations page. The balance sheet will reveal the bank’s assets/liabilities and whether or not the bank is profitable.
- Keep some of your money out of the banking system. Consider keeping cash in safe deposit boxes or home safes.
- Diversify with physical gold and silver. Owning and diversifying your wealth with physical gold and silver is an avenue to keep a portion of your wealth outside of the banking system. It’s easy to purchase precious metals bars and coins, they are easily transportable, and can be turned into paper money in any country around the world.
Gold and silver have been a store of value for 5,000 years and these highly valued precious metals continue to offers investors today a time-honored vehicle to protect and growth your wealth. It’s no surprise that more and more Americans are turning to the safety of gold today. Have you considered if you own enough?
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