by Simon Black
March 15, 2013 was a pretty normal day in Cyprus. It was a Friday,
and most people were looking forward to a relaxing weekend.
The next morning the entire nation woke up in horror. Their
politicians had been up all night, negotiating with international
lenders to provide an emergency loan to the country, and its banks.
It turned out that the banks in Cyprus were all insolvent:
just like banks in
the United States during
the 2008 sub-prime crisis,
banks in Cyprus had been making idiotic decisions with
their customers' hard-earned savings.
And by 2013, the banks' losses were too great to ignore.
depositors, the government of Cyprus was also broke, and they were
unable to bail out the banks. So they came up with a new idea:
Instead of a
bail-out, they had a bail-IN.
closed all the banks.
quickly ran dry and ceased functioning altogether.
Then they just
started confiscating deposits.
They called it a
'tax', but it was theft, plain and simple.
just came in and grabbed money from people's bank accounts…
then gave it right back to the banks to bail them out.
It was an incredibly
important lesson about banking:
most people simply
assume that their bank is in good financial condition… that,
since the bank is regulated and insured by the government, our
money must be safe.
Sometimes that's an
incredibly dangerous assumption to make. Even in the
US, we've seen how quickly banks' idiotic decisions can unravel.
Back in September 2008,
the entire US financial system came crashing down, practically
overnight, just like in Cyprus. A big part of the reason is that
banks have very little incentive to act conservatively and
responsibly with your money.
Think about it:
you walk into a bank
and hand them your paycheck, and in exchange they offer you a
'free checking account'.
Really? Free? If it's
free, then how does the bank pay for all of those fancy buildings
and huge bonuses?
By taking RISKS with
your money. They make loans and other investments - bonds, auto
loans, home mortgages, etc. And each of those carries some kind
To pretend otherwise is
There's risk in
everything you can possibly do with money… whether buying a
government bond, stuffing cash under your mattress, or owning Apple
stock. There's always risk...
And they take these risks with upwards of 97% of their deposits.
Current US banking regulations, in fact, require as little as
ZERO PERCENT of customer deposits to be held on reserve,
meaning almost all of your money can be gambled away on whatever
investment fad makes the bank the most money.
And that's the problem:
the incentives are
Banks make money by
putting YOUR money at risk. But they don't share the
reward. They pay you some pitiful interest rate like 0.02%. And then
keep all the rest for themselves.
Don't get me wrong - I obviously have no issues with any business
making money. That's
how capitalism works...
But incentives between businesses and their customers should be
when their money is safe, or at least when they are compensated
for risks. Yet banks only make money when they take risks with
customers' money without compensating them.
This model is deeply,
Now, in fairness, not all banks are created equal. Some are in much
better shape than others. And some jurisdictions are FAR safer than
You can actually figure this out for yourself by taking a look at
your bank's balance sheet.
Most big banks are
public and have to post their financial statements online.
If you hold your deposits at a smaller bank, you should ask them
for their financials. (And if they refuse to provide them, take
your money out immediately!)
A strong bank has a substantial 'net equity' or 'capital'
position as a percentage of its assets. This is known as a
bank's 'solvency ratio', and it should be - well - into the
A lot of banks have solvency ratios of 5% or less. This means
that if the bank's investments lose more than 5% of their value,
the bank will be wiped out.
That's not exactly a big margin of safety.
An example of a better
bank in the Land of the Free is
USAA Federal Savings Bank, which
has a solvency ratio of about 20%. That's a solid margin of safety.
But this is one of the big reasons why I tend to keep most of my
money overseas - international banks are often far better
capitalized and more liquid.
(Liquidity is another important concept - it means that the bank
keeps a MUCH higher percentage of reserves on hand, relative to
customer deposits. A liquid bank is typically a safer
And in addition to safer banks, many jurisdictions abroad also have
central banks, stronger insurance
funds, and more stable government finances.
In the US, for example,
the Federal Reserve (FED)
is on very shaky financial footing.
Last September the FED
actually reported unrealized losses of $66.5 billion, completely
wiping out the bank's $39.1 billion in capital. In other words, the
central bank which regulates and backstops the largest and most
important banking system in the world, is effectively
On top of that, the
FDIC (which is supposed to insure
trillions upon trillions of dollars in deposits in the US banking
system) admits in its own annual report that its deposit insurance
fund is currently insufficient to withstand a major banking crisis.
And finally there's the US federal government, with its $75 trillion
in NEGATIVE net worth.
So in the US we have,
with questionable balance sheets
undercapitalized deposit insurance fund
Seems like the perfect
place to keep 100% of your savings...!
Fortunately the world is a big place, and there are better options
It's 2019. Geography should no longer factor into your mental
calculus when it comes to making decisions about where to keep your
money. Most people just open an account at the bank across the
street. And that might be convenient to be able to withdraw some
cash from time to time.
But the bulk of your money should be located
wherever in the world it's treated best - where the banks are safe,
liquid, backed by a well-capitalized insurance fund in a
jurisdiction with no net debt.
My team recently spent a few hundred hours analyzing dozens of
traditional and online banks from more than twenty countries around
the world like,
...to determine where the
safest places are to deposit savings.