Tuesday, August 9, 2016

The Worst Place in the World to Bank

By Simon Black

It started with an illegal wiretapping scandal.

Jean-Claude Junker, after spending nearly 18 years in office as Prime Minister of Luxembourg, was forced to resign in 2013 after evidence surfaced of his complicity in a domestic spying operation.

So what does a disgraced politician who resigns in shame do?

Why, receive a promotion, of course.

Less than a year later, Junker was appointed to the most powerful political office in Europe-- President of the European Commission.

(I say “appointed” because Junker was selected by the reigning political establishment, not by voters.)

Aside from being one of Europe’s most prominent unelected policymakers, Junker has become legendary for his bizarre quips and daft behavior.

(Here’s some incredible footage of an intoxicated Junker marching in place and slapping around other world leaders at a press event.)

Among Junker’s most famous quotes are perhaps the truest eight words in politics: “When it gets serious, you have to lie.”

That was from 2011 when Junker was caught lying about a secret meeting about Greece’s debt crisis.

On the surface, the politicians insisted that Greece was just fine.

Yet all the while they were lying to the public, they were preparing for an emergency behind closed doors.

I was reminded of this quote recently when the European Central Bank published results of its bank “stress tests”.

The ECB conducted these tests to prove that Europe’s biggest banks were just fine and would be able to withstand another major crisis.

Surprise, surprise, nearly every bank
in Europe passed with flying colors, as if the ECB were saying, “Nothing to see here people...”

One of the ECB’s primary missions, after all, is to maintain stability in the financial system.

And when your financial system is this toxic, the ECB can’t maintain stability by telling the truth about their insolvent banks.

“When it gets serious you have to lie.”

Here’s the reality: Europe’s banking system is toast.

Wholesale interest rates on the continent are already negative.

Negative interest rates essentially penalize any bank that tries to be responsible and hold extra reserves

What an unbelievably stupid policy.

Rather than encourage banks to be conservative with their customers’ deposits, the ECB is practically forcing them to make as many loans as possible.

So it’s not exactly much of a shocker to find out that, in their haste to loan out almost 100% of their customers’ money, many of the loans went belly-up.

EU data showed that by the end of September 2015, 17% of Italian loans were non-performing. The non-performing loan rate is a shocking 43.5% in Greece, and 50% in Cyprus.

(That data is nearly a year old, so the numbers are worse now.)

This is a huge problem. Banks have lost a big chunk of their depositors’ savings.

There’s a lot of talk now about government bail-outs. And some of that has already taken place.

In Italy, the government already had to step in with a 150 billion euro guarantee just to forestall a potential bank run.

But the Italian government is one of the most bankrupt in the world, with a debt level that exceeds 130% of GDP; they’re in no position to bail anyone out.

That’s why, as of January 2016, European “bail in” legislation has taken effect.

The rules are already in place whereby depositors can be held liable for the idiotic financial decisions of their banks.

If the bank goes under, they can take your money down with it.

It’s already happened.

In 2013, the government of Cyprus froze EVERY bank account in the country, locking every single depositor out of his/her savings.

These risks are very real.

Banks are illiquid and overleveraged. They’ve made far too many bad loans with their customer’s savings.

The governments are in no financial position to bail them out. And the bail-in legislation already exists to steal from depositors.

What’s the point of holding money in this kind of system, especially when the biggest benefit you could hope for is about a 0.1% yield on your savings account?

When you step back think about the big picture, the conclusion is pretty obvious: don’t hold money in such a precarious banking system.

And yet, it’s very seldom that anyone really thinks about his/her bank.

Chances are most people put more thought into what they’re going to have for dinner tonight than where their money should live.

A bank is your silent financial partner. This is an incredibly important decision.

Especially given that once you turn over your hard-earned savings, it’s not even your money anymore. You become an unsecured creditor of the bank.

A decision of this magnitude deserves more analysis. And anachronistic features like a bank’s location shouldn’t factor into the calculus.

Geography is totally irrelevant in the 21st century. You shouldn’t hold your money somewhere just because the bank is near your house.

Rather, your money should live where it’s safest and treated best.

Just in the same way that you would choose your neighborhood based on its safety or quality of schools for the kids, you can choose your bank (or at least banking jurisdiction) based on safety and quality.

For example, avoid banking in countries that have already adopted bail-in rules that allow them to steal depositors’ savings.

This includes Canada and the EU.

(The US Dodd-Frank legislation is conveniently opaque on this issue-- more on that another time.)

Also, avoid banking in countries that are heavily-indebted; those are the places most likely to run into serious problems, and you don’t want your money anywhere near them.

Again, this rules out most of Europe.

Last, consider other options. You don’t need to hold 100% of your wealth in a bank, especially one that is in questionable health.

Physical cash and precious metals can be an excellent substitute for bank deposits, especially as interest rates continue to slide below zero.

Simon Black is Founder of SovereignMan.com.

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