Good morning ! This is for a withdrawal – A phrase that banks would not like to hear too often from their customers, under penalty of not being able to return all of their funds to depositors. But while the US Federal Reserve (EDF) just put 25 billion dollars on the table to stop the contagion linked to bankruptcy of the Silicon Valley Bank (SVB), it is time to focus on the protection of bank deposits.
The FGDR: the protector of deposits in France
If you are a customer of a French bank, you should receive information each year aimed at protecting your bank deposits. This e-mail or letter of which you are the recipient reminds you that your funds are (in principle) protected up to $100,000 per depositor and per bank.
This protection is provided by a dedicated body, the Deposit and Resolution Guarantee Fund (FGDR) which is intended to to guarantee to depositors of recover their funds in the event of default one or more banking establishments.
To date, the FGDR has almost 500 members and is therefore supposed to cover almost all the assets deposited in the country’s banks. With the exception of regulated savings accounts such as the Livret A and the Livret de Développement Durable et Solidaire (LDDS), the balances of which are directly guaranteed by the State.
Why should bank account balances be guaranteed?
In an ideal world, every euro deposited in the bank would be immediately recoverable, and no institution would have to suffer the risk of panic or bank runas the bank would be able to immediately release their funds to all of its customers.
However, the banks invest the money that you entrust to them. The Livret A and the LDDS are used, for example, to finance construction programs or help support innovative companies.
It is also very common for the bank to invest and place your capital. This is what Silicon Valley Bank (SVB) did, investing in 1% US Treasuries when key interest rates were negative. An investment which, at the time, appeared to be risk-free.
But in a context of general interest rate hikes, no one wants to buy back its 1% bonds from the SVBwhile bonds newly issued on the market are much more profitable (4 or 5%).
As a result, the bank, even if it has not lost its customers’ money, is not able to return it to them immediately. This generates an obvious liquidity problem. Quite naturally, the bank’s customers then wanted to recover their deposits as quickly as possible in order to avoid suffering from this lack of liquidity, which precipitated the establishment’s downfall.
Bank resolution mechanisms: a good solution?
To avoid contagion from the financial sector, the authorities have implemented so-called “resolution” mechanisms which allow tostem financial crises before these take disproportionate consequences.
Thus, each financial institution with a banking license in France must contribute to the FGDR, which operates like a traditional insurance company and which will use the contributions paid by members to cover the bankruptcy of one of them.
However, such a mechanism suffers from a major problem: the funds collected by the FGDR are simply not enough to ensure the success of its mission in the event that a major institution fails.
In 2021 all of the funds raised by the FGDR amounted, according to its report of activity, to €6.1 billion. This represents approximately 0.5% of French bank deposits.
It is therefore very unlikely that the FGDR will be able to stem the bankruptcy of a medium or large banking institution… bearing in mind that the cover provided by the FGDR is limited to €100,000 per bank and per depositor.
There is a Single European Resolution Fund whose objective is to have, by the end of the year, funds equivalent to 1% of European bank deposits. This fund could come to help punctually in the event of bankruptcy of a French bank. But it’s a safe bet that, if the situation required the intervention of this European fund, our national banks would not be the only ones to sufferEuropean aid would be diluted in many States and, ultimatelyit would not save the system.
So be careful!
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The FDIC: the one that protects bank deposits in the United States
There Federal Deposit Insurance Corporation (FDIC) works in a relatively similar way to our French FGDR. This independent agency aims to protect American bank deposits. And it must do this by using the contributions paid by banking establishments.
You have to admit to the FDIC some success. In place since 1934, it has intervened on numerous occasions to allow customers of bankrupt banks to have their deposits bought by a competitor and not to lose a penny in the transfer operation.
This being, this mechanism only protects depositors up to $250,000 and almost went bankrupt itself at the end of 2009at which time the FDIC had to request payments of several years of contributions in advance from its members in order to stay afloat.
As a last resort, the Fed
As we saw above, existing resolution mechanisms are not sufficient.
The FED is well aware of this and this is certainly the reason why it has just announced a $25 billion bank relief package to enable them to cope with this complicated period.
In order to stem the risks of widespread panic and a major financial crisis, the EDF and the FDIC have just announced the taking of measures to cover all deposits placed on the books of SVB and Signature Bank.
Alas, the use of the magic printer available to the Federal Reserve is not likely to put an end to inflationwhich is itself the consequence of the unreasonable money printing of recent years.
Fighting inflation by raising rates risks jeopardizing the economy, which will then have to be put under the oxygen of money printing again. It is a vicious circle from which we are not guaranteed to emerge unscathed.
Unfortunately, there is no certain answer to this. We live in a complicated period which imposes a rigorous risk management which, necessarily, passes through the diversification of capital across multiple assets and asset classes (stocks, real estate, cryptos). At any rate, smooth your entry price by opting for the DCA can be a good decision.
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