It’s been about 9 months since the Wells Fargo scandal that sparked my last post on the risks of keeping your savings in the bank.
Today I had not one, but two, reminders of just why I keep so little money in banks and I wanted to share…just in case anyone’s forgotten that having all your money in a bank is one of the riskiest things you can do with your life savings.
Trouble Across the Pond
The first reminder came when I read that Spain’s sixth largest bank, Banco Popular, had been sold in a hasty 24 hour deal to Spain’s largest bank, Santander, for €1 ($1.12)…total.
Over the last few weeks Banco Popular had lost billions of euros to depositor withdrawals. This massive cash outflow was making regulators nervous about the bank’s ability to continue making payments to its bondholders, i.e. creditors.
So rather than allowing the bank to miss payments and create a panic, European regulators essentially made a drug deal.
While I don’t pretend to understand all the technicalities of banker speak, as near as I can understand, one group of Banco Popular’s bondholders were told their bonds wouldn’t be repaid and the other group received shares of bank stock in lieu of their bonds.
Then a former competitor, Santander, was saddled with the (hopefully) healthy portion of Banco Popular’s business.
Now Santander, who can’t possibly know what kind of mess they’ve just inherited, is hoping to raise €7 billion to try to keep their new acquisition afloat.
I wish them luck.
In the meantime what about the depositors who didn’t get their money out of Banco Popular before the overnight merger?
Can they get to their money?
Is their money even still there?
Will they at least be able to get token amounts to pay for groceries or fuel during the transition?
That’s not a situation you ever want to find yourself in, dependent on a collapsed financial institution for basic necessities.
This is a great reminder that when a bank gets in trouble, you, the depositor, will be an afterthought.
We’ve seen this scenario play out in Cyprus, Greece, Spain, Argentina, India and Venezuela in just the last few years.
To think it can’t happen here is to place an enormous trust in an industry that has proven over and over and over again that it is unworthy of trust.
The second experience resulted from trying to decide where to open a business checking account this afternoon.
Researching the various offerings, comparing account fees and features, reviewing financial statements and reading consumer reviews reaffirmed my conviction of the importance of using banks as a very limited partner in managing my finances.
Selecting a bank feels a bit like Russian roulette to me.
A bank is supposed to be a trustworthy steward of your capital who puts it to profitable use by making judicious loans to creditworthy borrowers that can be counted on to repay the principal and provide interest income to both you and the bank.
Instead banks today take people’s hard earned savings and “invest” them in some of the most horrendous credit risks imaginable; subprime borrowers, naive college students and hopelessly indebted governments just to name a few.
And for the risk you take on as a depositor to such an institution you’re rewarded with an effective 0% interest rate on your savings.
Unfortunately, this is how modern banking works.
Mind Your Own Business
Robert Kiyosaki, author of Rich Dad, Poor Dad, is fond of advising people to “mind their own business.”
By that he means that nobody will watch out for your financial well being like you will, so take the necessary steps to make sure your own financial house is in order.
Banks are doing stupid things and eventually it’s going to cause huge problems. That’s just a fact. Yes it’s immoral and unjust, but it’s a fact. So don’t let yourself get caught up in it.
Most people respond to this by sticking their head in the sand.
The prudent Lever Builder, however, will respond by taking action to ensure that his or her financial Place to Stand is insulated from the inevitable fallout by building a financial foundation designed to withstand the crazy times we live in.
We’ve discussed how to do this before. There are extremely simple things you can do today to protect a portion of your savings from the consequences of poor banking practices and to make sure that, come what may, you and your family will be ok.
First, you can stop by the bank on your way home from work tonight, withdraw some physical cash to tuck away at home and instantly be insulated from a bank holiday or closure.
Second, you can buy a few gold or silver bullion coins online today and instantly move a portion of your savings into a form that can’t be bailed-in by a bank or inflated into oblivion by a central bank.
Don’t go overboard; you certainly don’t want to have the entirety of your life savings sitting in a box in your house. That would be irresponsible.
But not to respond to such obvious warning signs by taking these easy steps to ensure you have ready access to enough cash to see you through a month or two of turbulent times in the financial sector is to put your financial Place to Stand in jeopardy.
Making the Best of a Tough Situation
I believe that as banks continue to abuse the trust placed in them they will eventually render themselves obsolete; replaced by technology that is safer, faster and more honest.
Until that day comes we need to make the best of the need to use banks.
Personally, I do that by using this simple method to get a sense of how safe my banks are, keeping only money that I plan to spend within a few months in my bank accounts and then finding more trustworthy homes for the rest.
I hope to share more about my favorite alternative financial home in the coming weeks.