When Cyprus went bankrupt, the European Union and the International Monetary Fund required the nation to forcefully confiscate part of the deposits of unsecured depositor’s money. Bank accounts over €100,000 were raided to help pay for the national rescue.
The next question was whether it could be done elsewhere. And many experts and pundits alike said that it was certainly possible. In fact, some went so far as to say that confiscation of cash assets was the new model for rescuing a failing nation or bank.
Most people think their money is secure in a bank. The Federal Deposit Insurance plan in the U.S., and comparable programs in other countries have strengthened this viewpoint. The expansion of the money supply by central banks has also strengthened the idea that when money is needed, it will be available. But can a Cyprus style raid on your wealth happen to you? Of course it can! Here’s why.
It’s called “fractional reserve banking.” This is when you make a deposit into a bank account and the bank gives you a receipt and keeps track of the money in that account for you. However, the bank also turns around and lends part or most of that deposit to someone else. The bank keeps some of the money on hand to pay those who may need some or all of their money. But if most people want their money at once, they would not be able to pay out their claims
That receipt that the bank gave you for your deposit is a debt claim. They owe you that money, but in fact, you have placed it at risk. You have trusted them to look after it, but you have given them permission to make money with it through interest, by lending it to someone else. If the bank goes bankrupt what happens to your money? That’s what deposit insurance is all about. If the bank goes bankrupt, the deposit insurance company pays you up to $100,000 or whatever currency it is, and you go on your way. But if you have more than the insured amount in your account, you could lose part or all of it, which is what happened in Cyprus.
When you turn your money over to a bank, that money is no longer your own. It belongs to the bank. Yes, they owe you a debt, but the money is theirs. You are an unsecured creditor holding an IOU. Deposit insurance only helps shield you from the risk that the bank won’t be able to give you your money back.
Cyprus is also a reminder that when a nation gives up its own currency for another multi-national currency, the nation loses control over its destiny. And so does its banks. The banking crisis in Cyprus is a potent reminder that there may not be money to rescue banks that take huge risks with their depositors’ money.
And yes, it can happen to you. Canada, New Zealand and Italy all have plans to make their depositors cough up at least some of their deposits to rescue their banks. In the United States and Great Britain depositors would be forced to take shares in potentially worthless banks in exchange for their unsecure deposits.
Oh yes, the harsh new reality if banking regulators think they need your help, it will happen. This risk to your deposited wealth is the inevitable consequence of fractional reserve banking.
The Bible predicts that wealth will suddenly become worthless. “Go to now, ye rich men, weep and howl for your miseries that shall come upon you. Your riches are corrupted, and your garments are moth-eaten. Your gold and silver is cankered; and the rust of them shall be a witness against you, and shall eat your flesh as it were fire. Ye have heaped treasure together for the last days.” James 5:1-3
“Men will invest in patent rights and meet with heavy losses, and it is taken as a matter of course. But in the work and cause of God, men are afraid to venture. Money seems to them to be a dead loss that does not bring immediate returns when invested in the work of saving souls. The very means that is now so sparingly invested in the cause of God, and that is selfishly retained, will in a little while be cast with all idols to the moles and to the bats. Money will soon depreciate in value very suddenly when the reality of eternal scenes opens to the senses of man.” Evangelism, pg. 62