Showing posts with label deposit insurance. Show all posts
Showing posts with label deposit insurance. Show all posts

Saturday, August 02, 2014

Quote of the Day: The FDIC’s very paltry defense against defaults

Since then, FDIC recovered a bit, and as of 2013 had $47 billion back in its fund. This small defense was insuring some $6 trillion in insured bank deposits, a coverage ratio of 0.79 percent.

Now when I brought up this alarming situation at my personal blog, some people scoffed in the comments. Why, if there is ever another wave of bank failures, the FDIC can just borrow from the Treasury. Ultimately, the government can just turn to the Federal Reserve to create new money and make everybody whole. Now that we’ve gotten rid of that pesky gold standard, Uncle Sam can hand out unlimited amounts of dollars.

Such a reaction is shocking in its glibness. Remember that FDIC is supposed to be an insurance program. It doesn’t get its fund from taxpayers, but from premiums assessed on the insured banks themselves. Indeed, in order to replenish its fund, back in 2009 FDIC made the banks “prepay” thirteen quarters (i.e. a little more than three years) worth of premium payments. Once the immediate danger was past, FDIC issued refunds of these overpayments in 2013.

Nobody doubts that the government has the technical ability to create billions or even trillions of dollars and hand them out. But that isn’t a way for society as a whole to become richer. Yes, if a small number of depositors lose money on a few failed banks, then the rest of us can—via the government—act as a backstop, and spread the losses around, so that any individual feels just a slight amount of pain.

Yet having government-imposed deposit insurance makes the system as a whole far more vulnerable, particularly when the banks are being assessed such low premiums (in normal times). Precisely because people think, “My money is 100% guaranteed in the bank,” nobody ever does research on what exactly his or her bank does with the funds it lends out. People care about monthly fees, branch hours, and ATM locations, but they don’t ever inquire, “Does my bank make wise investments?”

FDIC as implemented thus gives us the worst of both worlds: It lulls depositors into a false sense of security, so that there is little market discipline reining in reckless lending by the banks. Yet at the same time, given that the system is pushed to embrace risk, FDIC nonetheless carries a very paltry defense against defaults. In the event of a major downturn, the government would have to freshly dip into taxpayers in order to take money from us, so that it could give us our money back.
(bold mine, italics original)

This is from Austrian economist, consultant and author Robert P Murphy at the Libertychat.com

The above is a noteworthy example where centralization of a complex process via political interventions, particularly applied to the US banking system, increases systemic risks. That's because such actions skews on the market's incentives to self regulate via the promotion of depositors' dependency on political authorities, as well as to advance the Moral Hazard incentives of the banking industry.

This also shows of the knowledge problem of political authorities who seem to underestimate the risks from the current system, or alternatively, appears to overestimate the strength of the banking system or the FDIC's capacity to contain risks.  And this may be aside from the possible "regulatory capture" where the banking industry may have influenced authorities on the "low premiums" for maintaining a tenuously funded politically controlled centralized deposit insurance. All these and more combine to produce "the paltry defense against default".

Thursday, March 27, 2014

Chinese Mini-Bank Runs: Show ‘em the Money and Deposit Insurance

The other day I posted here of a mini-run of a small Chinese rural bank in progress

What course of action has been taken in order quell the run? 

Well, Show ’Em the money!!! Literally.

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From the Guardian: (bold mine)
Rural banks in China's eastern city of Yancheng stacked piles of money in plain view behind teller windows to calm depositors queueing at bank branches for a third consecutive day, following rumours they had run out of cash.

According to residents of Sheyang county, panic began on Monday with a rumour that a branch of one local bank turned down a customer's request for a 200,000 yuan (£19,500) withdrawal. Banks declined to comment and Reuters was unable to verify the rumour.

The affected institutions are tiny compared with the scale of China's financial sector, and the rush for cash appears to be an isolated incident so far. Rumours found especially fertile ground there after a failure of three less-regulated rural credit co-operatives last January. Yet the news caught nationwide attention, reflecting growing public anxiety as regulators signal greater tolerance for credit defaults.
Well did show 'em the money work? Unfortunately not. (bold mine). From the same article...
Despite repeated appeals from local officials for calm, by Tuesday the run had extended to another local bank, the Rural Commercial Bank of Huanghai, residents said.

Earlier on Wednesday police and security guards stood by as dozens formed a long queue outside while an electronic sign urged depositors not to be worried by rumours.

The governor of Sheyang county, Tian Weiyou, posted a two-minute video statement on the county government's website on Wednesday, urging depositors not to panic. In it he said: "Please be assured that the People's Bank of China and the rural commercial bank system will ensure the interests of all depositors will be protected. The county's rural commercial banks will ensure that there will be enough funds for depositors to withdraw at any given time."
As one would note, "tiny" and "isolated" in the above report seem to have been negated by "extended to another local bank"

What this instead shows is the periphery-to-the-core dynamic in motion or the contagion from the fringe moving into the center.

The article goes on to advocate deposit insurance as a solution to the banking system's debt problem. 

But deposit insurance will signify a short term solution that comes not only at the cost of taxpayer money but also increases systemic risks from moral hazard—tendency to take on more risks because the costs of the risks will be borne by another partyin the long run.

As International University of Geneva Professor Frank Hollenbeck explained at the Mises Institute (as applied to the US) [bold mine]
Deposit insurance is one of the two factors which allows banks to take such risky gambles. Created in 1933, it is a perfect example of government policy that ultimately will be determined to have done more harm than good. It was supposed to reduce risks, but has done just the opposite. When governments provide flood insurance the private sector would never consider, people then build homes in areas prone to suffer from severe flooding.

Prior to deposit insurance, people were careful about where they deposited their money to pay rent or food bills. If a bank ran into trouble by undertaking poor lending practices, people would quickly try to pull their money out of the bank. Bank runs were a good thing because runs served to force banks to be extremely careful about their lending practices. The threat of a bank run maintained sound incentives.

Deposit insurance is a perfect example of Frederick Bastiat’s parable of the broken window: what is seen, and what is not seen. For about 70 years, bank runs have been eliminated; giving depositors what some would say is the illusion of protection. That is what is seen. What is not seen is, without insurance, banks would have been taking much less risks with deposits, and governments would have been less able to finance spending through bank purchases of their bonds.
In other words, deposit insurance is a privatize profits-socialize losses transfer mechanism that works in favor of the banking system charged to taxpayers.

And this also means that a lot today’s global financial and economic imbalances, aside from inflationism, stems from many other price distorting regulations such as deposit insurance. 

Two wrongs don’t make a right. 

China's problems has been about massive accumulation of unproductive debt fueled by fractional reserve banking, thus markets should clear such imbalances.

Meanwhile, the periphery to the core “run” on Chinese institutions continues…
 
Updated to add: With the shrinking availability of domestically sourced liquidity as the financial spigot have been closing, Chinese developers have reportedly tapped on a new way of financing: cross border Commercial Mortgage Backed Securities (CMBS).

Thursday, March 28, 2013

Quote of the Day: The Roots of the Too Big To Fail Doctrine

For fractional reserve banking can only exist for as long as the depositors have complete confidence that regardless of the financial woes that befall the bank entrusted with their “deposits,” they will always be able to withdraw them on demand at par in currency, the ultimate cash of any banking system. Ever since World War Two governmental deposit insurance, backed up by the money-creating powers of the central bank, was seen as the unshakable guarantee that warranted such confidence. In effect, fractional-reserve banking was perceived as 100-percent banking by depositors, who acted as if their money was always “in the bank” thanks to the ability of central banks to conjure up money out of thin air (or in cyberspace). Perversely the various crises involving fractional-reserve banking that struck time and again since the late 1980s only reinforced this belief among depositors, because troubled banks and thrift institutions were always bailed out with alacrity–especially the largest and least stable. Thus arose the “too-big-to-fail doctrine.” Under this doctrine, uninsured bank depositors and bondholders were generally made whole when large banks failed, because it was widely understood that the confidence in the entire banking system was a frail and evanescent thing that would break and completely dissipate as a result of the failure of even a single large institution.
(italics original) 

This is from Austrian economics professor Joseph Salerno at the Mises blog

Monday, March 25, 2013

Central Bank Fractional Banking System: Bank Runs or Inflation

The incumbent central bank fractional banking system means a choice between bank runs and price inflation.

The great dean of Austrian school of economics Murray N. Rothbard explained. (bold mine)

1. Why fractional reserve banks are uninsurable
The answer lies in the nature of our banking system, in the fact that both commercial banks and thrift banks (mutual-savings and savings-and-loan) have been systematically engaging in fractional-reserve banking: that is, they have far less cash on hand than there are demand claims to cash outstanding. For commercial banks, the reserve fraction is now about 10 percent; for the thrifts it is far less.

This means that the depositor who thinks he has $10,000 in a bank is misled; in a proportionate sense, there is only, say, $1,000 or less there. And yet, both the checking depositor and the savings depositor think that they can withdraw their money at any time on demand. Obviously, such a system, which is considered fraud when practiced by other businesses, rests on a confidence trick: that is, it can only work so long as the bulk of depositors do not catch on to the scare and try to get their money out. The confidence is essential, and also misguided. That is why once the public catches on, and bank runs begin, they are irresistible and cannot be stopped.

We now see why private enterprise works so badly in the deposit insurance business. For private enterprise only works in a business that is legitimate and useful, where needs are being fulfilled. It is impossible to "insure" a firm, even less so an industry, that is inherently insolvent. Fractional reserve banks, being inherently insolvent, are uninsurable.
2. Money Printing as camouflage. The political choice of inflation over bank runs.
What, then, is the magic potion of the federal government? Why does everyone trust the FDIC and FSLIC even though their reserve ratios are lower than private agencies, and though they too have only a very small fraction of total insured deposits in cash to stem any bank run? The answer is really quite simple: because everyone realizes, and realizes correctly, that only the federal government--and not the states or private firms--can print legal tender dollars. Everyone knows that, in case of a bank run, the U.S. Treasury would simply order the Fed to print enough cash to bail out any depositors who want it. The Fed has the unlimited power to print dollars, and it is this unlimited power to inflate that stands behind the current fractional reserve banking system.

Yes, the FDIC and FSLIC "work," but only because the unlimited monopoly power to print money can "work" to bail out any firm or person on earth. For it was precisely bank runs, as severe as they were that, before 1933, kept the banking system under check, and prevented any substantial amount of inflation.

But now bank runs--at least for the overwhelming majority of banks under federal deposit insurance--are over, and we have been paying and will continue to pay the horrendous price of saving the banks: chronic and unlimited inflation.

New Picture (20)
The political choice of inflation over bank runs can be seen via the loss of US dollar’s purchasing power.

Since the establishment of the US Federal Reserve in 1913, one US dollar in 1913 has an equivalent of buying power of $23.45 today according to the BLS inflation calculator. This means the US dollar have lost nearly 96% of their purchasing power. Chronic and unlimited inflation indeed.

The other implication is that the choice of inflation over bankruns means a subsidy to banks at society's expense.
 
3. Abolish the central banking system and ancillary regulators. Restore sound money
Putting an end to inflation requires not only the abolition of the Fed but also the abolition of the FDIC and FSLIC. At long last, banks would be treated like any firm in any other industry. In short, if they can't meet their contractual obligations they will be required to go under and liquidate. It would be instructive to see how many banks would survive if the massive governmental props were finally taken away.

Cyprus: The Mouse that Roared

Unfolding events in Cyprus may or may not be a factor for the Phisix or for the region over the coming days. 

This will actually depend on how the bailout package will take shape, and importantly, if these will get accepted by the “troika” (IMF, EU and the ECB), whose initial bid to force upon a bank deposit tax indiscriminately on bank depositors had been aborted due to the widespread public opposition.

So far, the Cyprus parliament has reportedly voted on several key measures[1] as nationalization of pensions, capital controls, bad bank and good bank. Reports say that the Cyprus government has repackaged the bank deposit levy to cover accounts with over 100,000 euros with a one-time charge of 20%[2]!

The troika demands that the Cyprus government raise some € 5.8 billion to secure a € 10 billion or US $12.9 billion lifeline.

If there may be no deal reached by the deadline on Monday, then Cyprus may be forced out of the Eurozone. Then here we may see uncertainty unravel across the global financial markets as a Cyprus exit, which will likely be exacerbated by bank runs and or social turmoil, may ripple through the banking system of other nations.

However, if Cyprus gets to be rescued at the nick of time, then problems in the EU will be pushed for another day.

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Nonetheless unfolding events in a 1 million populated Cyprus, but whose banking system has been eight times her economy[3] has so far had far reaching effects.

The Cyprus “bail in” has already ruffled geopolitical feathers.

Germans are said to been reluctant to provide backstop to Cyprus due to nation’s heavy exposure to the Russians, where the latter comprises about a third of deposits of the Cyprus banking system. Much of illegal money from Russia has allegedly sought safehaven in Cyprus.

The Cyprus-Russia link goes more than deposits. They are linked via cross-investments too.

Some say that the Germans had intended to “stick it to the Russians”[4].

On the other hand, Russians have felt provoked by what they perceive as discrimination.

Meanwhile events in Cyprus have also opened up fresh wounds between Greeks and the Turkish over territorial claims[5].

The other more important fresh development is of the bank deposit taxes.

Where a tax is defined[6] as “a fee levied by a government on income, a product or an activity”, deposit taxes are really not taxes, but confiscation.

Some argue that this should herald a positive development where private sector involvement takes over the taxpayers. Others say that filing for bankruptcy would also translate to the same loss of depositor’s money.

Confiscation is confiscation no matter how it is dressed. It is immoral. Private sector involvement is forced participation.

Bankruptcy proceedings will determine how losses will partitioned across secured and unsecured creditors and equity holders. Not all banks will need to undergo the same bankruptcy process. Yet confiscation will be applied unilaterally to all. For whose benefit? The banksters and the politicians.

And one reason bondholders have been eluded from such discussion has been because Cyprus banks have already been pledged them as collateral for target2 programs at the ECB[7].

clip_image002

The more important part is that events in Cyprus have essentially paved way for politicians of other nations, such as Spain and New Zealand[8], to consider or reckon deposits as optional funding sources for future bailouts.

With declining deposits in the Eurozone[9], the assault on savers and depositors can only exacerbate their financial conditions and incite systemic bankruns.

So confidence and security of keeping one’s money in the banking system will likely ebb once the Cyprus’ deposits grab policies will become a precedent.

This is why panic over bank deposits have led to resurgent interest on gold and strikingly even on the virtual currency the bitcoin[10]. The growing public interest in bitcoin comes despite the US treasury’s recently issued regulations in the name of money laundering[11].

Such confiscatory policies will also redefine or put to question the governments’ deposit insurance guarantees. Not that guarantees are dependable, they are not; as they tend increase the moral hazard in the banking system as even alleged by the IMF[12]

Deposit guarantees are merely symbolical, as they cannot guarantee all the depositors. Given the fractional reserve nature of the contemporary banking system, if the public awakens to simultaneously demand cash, there won’t be enough to handle them. And obliging them would mean hyperinflation. That’s the reason the dean of the Austrian economics, Murray Rothbard calls deposit insurance a “swindle”[13].
The banks would be instantly insolvent, since they could only muster 10 percent of the cash they owe their befuddled customers. Neither would the enormous tax increase needed to bail everyone out be at all palatable. No: the only thing the Fed could do — and this would be in their power — would be to print enough money to pay off all the bank depositors. Unfortunately, in the present state of the banking system, the result would be an immediate plunge into the horrors of hyperinflation.
So governments will not only resort to taxing people’s savings implicitly (by inflation), they seem now eager to consider a more direct route: confiscation of one’s savings or private property. Note there is a difference between the two: direct confiscation means outright loss. Inflation means you can buy less.

Finally, losses from deposit confiscation, and its sibling, capital controls will lead to deflation.

Confiscatory deflation, as defined by Austrian economist Joseph Salerno, is inflicted on the economy by the political authorities as a means of obstructing an ongoing bank credit deflation that threatens to liquidate an unsound financial system built on fractional reserve banking.  Its essence is an abrogation of bank depositors' property titles to their cash stored in immediately redeemable checking and savings deposits[14]

The result should be a contraction of money supply and bank credit deflation and its subsequent symptoms. This will be vented on the markets if other bigger nations deploy the same policies as Cyprus.

That’s why events in Cyprus bear watching.






[4] Investopedia.com The Cyprus Crisis 101 March 19, 2013


[6] Investorwords.com Tax

[7] Mark J Grant Why Cyprus Matters (And The ECB Knows It) Zero Hedge March 23, 2013


[9] The Economist Infographics March 23, 2013



[12] Buttonwood What does a guarantee mean? The Economist March 19, 2013

[13] Murray N. Rothbard Taking Money Back January 14, 2008 Mises.org

[14] Joseph Salerno Confiscatory Deflation: The Case of Argentina, February 12, 2002 Mises.org

Wednesday, June 13, 2012

Pavlovian Markets Rise on ECB’s Proposed Deposit Guarantees

US and European stocks went back into a Risk ON mode last night while Asian stocks climb again today on another report of a planned stimulus: Deposit Guarantees.

From Reuters

European Central Bank Vice-President Vitor Constancio made a fresh push for the bank to become the supervisor of the euro zone's biggest banks on Tuesday, saying the wording of Europe's founding treaty meant it would be an easy change to make.

The ECB is the driving force behind a three-pillar plan for a euro zone banking union, consisting of central monitoring of banks, a fund to wind down big lenders and a pan-European deposit guarantee.

As previously pointed out, ‘guarantees’ signify as the politician’s and mainstream’s travesty where the public has been made to believe that government’s stamp or edicts can simply do away with the laws of economics. Everyone is made to look at the intended goal, while ignoring the reality of who pays for such guarantees and how to get there. Yet the crisis, since 2008, continues to worsen. These guarantees are really meant to pave way for massive inflationism

Nevertheless the past few days has seen an incredible surge in volatility

image

Monday, the US S&P had a fantastic rollercoaster 2% ride. The major US benchmark was initially up on the news of Spain’s bailout, but the day’s gains had been reversed where the S&P closed sharply down 1.14%. Last night was another huge 1.13% upside close which offset Monday’s decline.

The Risk ON-Risk OFF landscape has obviously been intensifying, all premised on government’s Pavlovian classic conditioning. I worry that these huge swings could become a dangerous precedent that could ominous of, or increase the risk of a ‘crash’, which I hope it won’t.

Financial markets has been transformed into a grand casino.

Caveat emptor

Thursday, June 07, 2012

Eurozone’s Proposes Grand Bailout: Regional Banking Union

So the rally incited by the Eurozone yesterday may have been triggered by reports of a proposed region wide banking union.

From the CNN Money

The European Union unveiled a plan Wednesday to create a coordinated banking union rather than leaving troubled nations to deal with their own banking crisis.

But the plans for more a unified EU bank regulator and bailout fund won't come in time to deal with the crisis sweeping Europe right now, including the beleaguered Spanish banking system which has become the epicenter of the European sovereign debt crisis.

The EU proposal would include a single deposit guarantee organization covering all banks in the union, something similar to the FDIC that covers U.S. bank deposits.

There would also be a common authority and a common fund that would deal with bailouts needed for the cross-border banks that are major players in the European banking system.

G7 keeping close tabs on Euro crisis

In addition, there would be a single EU supervisor with ultimate decision-making powers for the major banks, and a common set of banking rules.

"Today's proposal is an essential step towards a banking union in the EU and will make the banking sector more responsible," said European Commission President Jose Manuel Barroso in a statement. "This will contribute to stability and confidence in the EU in the future, as we work to strengthen and further integrate our interdependent economies."

The amount of the common bank rescue fund was not disclosed.

Many substantially important questions that begs to be answered:

Guarantees based on what and paid for by whom? Mostly the Germans? And since resources are limited or scarce, up to what extent are the Germans and other productive EU nations be willing to redistribute their resources to the unproductive and capital consuming economies? How will this affect EU regional politics particularly the relationship between rescuers and the rescued? How will this affect domestic politics particularly of the rescuing nations?

The idea of ‘risk free’ from government guarantees has proven to be a mirage and a regional banking union will be no different.

And as previously noted, banking union based on deposit insurance will likely mean the endgame for the euro.

The only thing this does is to centralize the EU banking system which even magnifies systemic fragility. What really would emanate from this coordinated plan would be massive inflationism. It’s still a plan, though. But markets appear to be reading through the plan as something imminent. [As a side note, everything has been so fluid, such that I can’t find confidence on this until after an official response has been made.]

Bailout schemes have short term effects with nasty longer term consequences. As proof, the Euro debt crisis has been a continuing crisis since 2008 and seems self-perpetuating amidst the series of past failed bailouts.

Sadly the other cost of this region-wide banking union will be the loss of liberty for many of the freedom loving Europeans, over the interim, or until the dismemberment of the euro currency (and the EU), and of further economic tumult ahead.

Wednesday, May 30, 2012

Will the Eurozone’s Deposit Insurance Policies Hasten the Unraveling of the Euro?

The great dean of the Austrian school of economics Professor Murray N. Rothbard once called deposit insurance a swindle. (bold emphasis mine)

The very idea of "deposit insurance" is a swindle; how does one insure an institution (fractional reserve banking) that is inherently insolvent, and which will fall apart whenever the public finally understands the swindle? Suppose that, tomorrow, the American public suddenly became aware of the banking swindle, and went to the banks tomorrow morning, and, in unison, demanded cash. What would happen? The banks would be instantly insolvent, since they could only muster 10 percent of the cash they owe their befuddled customers. Neither would the enormous tax increase needed to bail everyone out be at all palatable. No: the only thing the Fed could do — and this would be in their power — would be to print enough money to pay off all the bank depositors. Unfortunately, in the present state of the banking system, the result would be an immediate plunge into the horrors of hyperinflation.

Current crisis in the Eurozone seems to be partly actualizing what Professor Rothbard warned about: Europeans appear to be awakening from the “swindle” and have intensified demand for cash, which has been putting severe strains on the EU’s fractional reserve banking system.

From Bloomberg, (bold emphasis mine)

The threat of Greece exiting the euro is exposing flaws in how banks and governments protect European depositors’ cash in the event of a run.

National deposit-insurance programs, strengthened by the European Union in 2009 to guarantee at least 100,000 euros ($125,000), leave savers at risk of losses if a country leaves the euro and its currency is redenominated. The funds in some nations also have been depleted after they were used to help bail out struggling lenders, leading policy makers to consider implementing an EU-wide protection plan.

“These schemes were not designed to deal with a complete meltdown of a banking system,” said Andrew Campbell, professor of international banking and finance law at the University of Leeds in the U.K. and an adviser to the International Association of Deposit Insurers. “If there’s a systemic failure, there needs to be some form of intervention.”

With European officials openly discussing a Greek exit from the euro for the first time, savers in Spain, Italy and Portugal may start to withdraw cash on concern that those countries will follow Greece and their funds will be devalued with a switch to a successor currency. None of those nations has the firepower to handle simultaneous runs on multiple banks.

Pulling Deposits

Households and businesses pulled 34 billion euros from Greek banks in the 12 months ended in March, 17 percent of the country’s total, according to the ECB.

Deposits at banks in Greece, Ireland, Italy, Portugal and Spain fell by 80.6 billion euros, or 3.2 percent from the end of 2010 through the end of March, ECB data show. German and French banks increased deposits by 217.4 billion euros, or 6.3 percent, in the same period. Bank-deposit data for April will be released starting this week.

Using the Argentina crisis as precedent…

Savers pulled 27 percent of deposits from Argentina’s banks between 2000 and 2003 during a currency crisis, Nedialkov wrote. If Ireland, Italy, Portugal and Spain follow a similar pattern, about 340 billion euros could be withdrawn, he estimated.

Companies have already started to remove cash from southern Europe as soon as they earn it. Many already are sweeping funds daily out of banks in those countries and depositing it overnight with firms in the U.K. and northern Europe, according to David Manson, head of liquidity management at Barclays Plc in London, who advises company treasurers.

If the scale of bank run escalates, will the ECB, then, resort to massive inflationism to the point of hyperinflation just to rescue their banks??

Tuesday, September 30, 2008

Testing the Banking System’s Resilience: Deposit Insurance Coverage

Previously the conventional thinking was that the banking system signified as the ultimate bulwark of money. While people basically trusted banks because of their faith over governments (implied guarantees), many fail to realize that such government authored cartelized system, which centered on the powers emanating from central banks, are not foolproof and are likewise subject to incompetence or abuse-whose constant manipulations of the market can be equally disruptive-and thus, lead to a loss of faith or specifically a RUN.

BCA Research: Credit Markets Remain Jittery

The continuing tremors in the banking system, as indicated by the intensified stress in the credit markets (see BCA Research chart above), which has fundamentally emanated from the bubble bust in the US, has rippled almost internationally and has most importantly began to raise questions about the sanctity and integrity of the current operating monetary platform-the Paper money standard.

As the system remains besieged from its self-inflicted ordeal, it is everyone’s task to ensure of the security of their deposits via the institutionalized deposit insurance coverage or a safety net (guarantee) provided by government institutions to depositors in order to promote financial stability.

From the Economist

According to the Economist, ``AS BANKS tumble like skittles, customers across the world are eyeing their cash nervously. Savings are protected in around 100 countries, with varying degrees of generosity. Those spooked by a run on a bank in Hong Kong this month may have been particularly nervous because only HK$100,000 ($12,860) of their cash is protected, including interest. Ireland has recently extended its limit from €20,000 ($29,337) to €100,000, to reassure savers. In America the first $100,000 is guaranteed for each depositor at each bank, while Britain's savers are limited to £35,000 ($64,650) in one institution, although an increase is expected soon. It is not only a matter of how much is protected, of course, but also of how quickly and easily the savers would get it back.” (highlight mine)

Of course, the other alternative is to own precious metals.