What Everyone Should Know Before Depositing Their Money In a Bank

In case you’re wondering, only 10% of all humans have an “outie” belly button. At least that’s what Wikipedia claims.

For what it’s worth, like most folks, I have an “innie.”

By the way, belly buttons don’t have a monopoly on innies and outies; the financial world has them too. Specifically, I’m talking about the dangerous practice of bailouts and bail-ins that governments are employing with increasing frequency to save so-called “too big to fail” banks and businesses from bankruptcy.

Bailouts and Bail-ins

Most people are familiar with bailouts. They usually come in the form of government loans that transfer some or all of a failing entity’s risk to the taxpayers. One example: General Motors receipt of almost $50 billion in cash, loans and other bankruptcy aid from the government back in 2009. Unfortunately, the taxpayers will most likely lose $10 billion by the time the Treasury sells the last of its GM stock later this month.

While bail-outs indiscreetly affect almost everyone’s pocketbook through taxation, so-called bank “bail-ins” shift the risk to the depositors. That’s great news for the taxpayers.

Then again, if it’s your bank that requires the bail-in … well, not so much.

Recently, depositors with the insolvent Bank of Cyprus had 47.5% of their savings over $132,000 stolen from them under the guise of a bail-in. In fact, the Bank of Cyprus bail-in is the new blueprint that will be used in the European Union from here on out to save failing banks.

And don’t think bail-ins are just being limited to Europe. They’re not. Respected financial analyst Jim Sinclair is warning that bail-ins are coming to the United States too.

Unraveling the Illusion

I strongly suspect most people would be surprised to learn that when they hand their money over to the bank, by law, they become unsecured creditors and the bank becomes a debtor to them. The bank is then free to loan or invest the cash as it pleases, while the depositors are left with only a legal claim on their money.

Unfortunately if a bank goes, ahem, belly-up, then unsecured creditors are, by law, last in line when it comes to getting their money back; even the bank’s bond holders have more seniority. As such, there is often very little left for the unsecured creditors to recover.

Of course, the banks don’t tell you that when you’re putting your hard-earned money in their institutions. Then again, if they did, I suspect at least a few more people would decide to hide their money elsewhere — or, at the very least, greatly reduce the amount of cash in their interest bearing accounts.

Here are a few other points that I think many unwitting bank depositors fail to understand:

  • Banks operate under a fractional reserve system where, typically, only one out of every ten dollars deposited is backed by cash reserves. The rest essentially ends up being loaned out.
  • Because of the fractional reserve system, banks never have enough money available to cover their depositors if everyone decided to pull their money out at the same time due to a sudden loss of confidence.
  • If a bank fails, you could lose a portion of your deposits. Yes, the Federal Deposit Insurance Corporation (FDIC) insures individual accounts in the US up to $250,000; but insurance is only as good as the insurer — and the FDIC currently has just $25 billion on hand to cover $9.2 trillion in deposits. I know. With that in mind, it’s not unreasonable to envision the FDIC running out of funds in the event of a catastrophic systemic collapse — or even a limited one.
  • Banks aren’t liable for any lost deposits that aren’t reimbursed by the FDIC.

We’ve all been conditioned to believe that putting our money in the banks is a smart thing to do because it’s perfectly safe and insured by the federal government. The truth is, it’s all an illusion — built upon a fragile foundation of trust, and the good moral character and business acumen of the bankers to whom we entrust our money. Keep that in mind the next time you deposit your hard-earned cash into an interest-bearing bank account — especially considering how little interest the bankers are paying today.

The sad truth is, as deposit interest rates continue to fall towards zero, the risk-reward ratio gets tougher to justify with each passing day. Regardless of whether you have an innie or an outie.

Photo Credit: Orin Zebest


  1. 1

    Jim says

    Good post. The banks are running a confidence game, but more people are beginning to wake up. When enough of them do, the jig will be up, but not before a lot of people lose all of their savings first. What’s sad is the rules always ensure that the bankers make out like bandits.

  2. 4

    Kim says

    This gives me resolve where I have been procrastinating. I have all my meager life savings in Bank of America, in savings, checking and IRAs that earn nothing but a small amount – no risk.
    Part of procrastinating is not being sure what else to do since I believe we are going to collapse.
    Do you have criteria for how to pick a place? Do I just switch most to a local Credit union? Anywhere to guide me to ? I don’t want to be caught bc I was ignorant about what to do to protect what I have worked hard to save.

    • 5

      Len Penzo says

      Kim, I think smaller local credit unions are much safer bets than many of the larger banks who make a habit of investing in increasingly riskier ventures in order to generate larger ROIs.

      That being said, ultimately, we’ve got a currency problem. When the dollar finally dies, it won’t matter where you are holding your Federal Reserve Notes because they will be greatly devalued. In that case, your only refuge from a catastrophic loss of wealth will be tangible assets and precious metals.

  3. 6

    Spencer F says

    “Unfortunately, when a bank goes belly-up, unsecured creditors are, by law, last in line when it comes to getting their money back” Not true. Equity holders are last in line. Unsecured creditors are 2nd to last though; your point remains unchanged.

  4. 8

    DrewShock says

    If the FDIC doesn’t have enough money, why doesn’t the Federal Reserve just print them more? I understand they don’t even have to actually print it. It just shows up on a computer screen. They have been injecting 85 billion into banks by buying loans. The stock market is up big, the economy seems to be building slowly, so wouldn’t printing even more speed those two things up?

    I know if we lose world reserve status for our money it means trouble. But seems people still run to the dollar when scared.

    • 9

      Len Penzo says

      The Fed will be printing more very soon, Drew. They have to now because if they stop, the house of cards will come crashing down.

      The Fed’s reckless decision to start its money injection campaigns (known as quantitative easing) turned our economy into a money-junkie. QE is works just like any other drug for an addict. Our economy now needs bigger and bigger doses to get the same effects until, eventually, he overdoses and dies.

      The only other alternative is to cut off the “drug” and endure an extremely long and painful period of cold turkey — but the Fed won’t do that.

  5. 10


    I wish I knew what the answer was. Customers keep sticking money in banks based on that confidence that it will be there. Who knows what will happen when that confidence no longer exists?

  6. 11


    In my country the fees the banks charge are so big, that, if you deposit say 1000 bucks in few months, if you want to take it out, you’ll get maybe 980 or even less. I do think we’re better off with various assets and precious metals than giving them our money

  7. 13

    Brian says

    Aren’t the euro bail-ins a result of euro-specific banking rules? I.E. German dudes don’t wanna bail out cypriot/italian/greek banks? I don’t think that dynamic applies here.

    I’m pretty sure the US gov will do anything needed to keep the banking system going, as evidenced by the 2008/2009 crisis. In 2008 I was sure the financial system was coming down. Then rules were changed, and the government conjured up a trillion dollars to inject into the system, and miracle of miracles, the system was saved. I think you can be pretty sure that they will be happy to do it again to protect depositors if needed. Even if they have to mint the platinum coin.

    I’m not worried about losing my deposits, although I am worried about a) future inflation and b) the oligopoly of mega banks.

    • 14

      Len Penzo says

      The US has been looking at bail-ins, Brian. From one of the articles I linked to in my piece: “A joint paper by the U.S. federal Deposit Insurance Corporation (FDIC) and the Bank of England (BOE) dated December 10, 2012 shows, that these plans have been long in the making, that they originated with the G20 Financial Stability Board in Basel, Switzerland, and that the result will be to deliver clear title to the banks of depositor funds.” Yes, that FDIC.

      It’s coming. The bankers will be made whole at the expense of their depositors.

    • 17

      Bubba says

      are you married or do you have a boyfriend? How are you living with that much money hidden in your mattress. It`s got to be a joke. LOL

  8. 18

    Kim says

    I am now searching for a small local credit union so I can transfer my retirement accounts out of BoA and I have a question. I see a list of all the credit unions in my state with financial profiles. How do I judge them? They list assets to loans amount and net worth ratio? 1.34 was one- not sure what that means or if its good or bad!
    thanks for guidance

    • 19

      Len Penzo says

      Kim, credit unions by their very nature are going to be safer than banks. Make sure they have NCUA insurance, which is the equivalent to FDIC insurance. According to DailyFinance.com as of 2011, 96% of all credit unions were considered well-capitalized.

      For more info, read this article: http://www.dailyfinance.com/2011/03/03/is-your-credit-union-financially-sound/

      It also includes a link to an online tool at Bankrate.com that rates the health of your particular credit union. I used it to check mine and I’m happy to report that it got a 4-star rating (out of 5). Here is the link to that tool:


      I have no qualms keeping my cash and valuables at a 5-star (superior) or 4-star (sound) credit union. I would also rather be in a 3-star (performing) credit union than a big bank. But I would probably keep my cash and valuables at home before I would put them in a 2-star (below peer group) or 1-star credit union (low rated).

  9. 20

    Kim says

    Thank you. I get so lost in all this, but this is one concrete step I can take and will! I am also talking to my husband about preparing for economic collapse with your article…. we will see.

  10. 21

    Don says

    Great article… hopefully you can help me resolve a family dispute about banking. Our small hometown bank has a vault with a certain level of cash on hand, my brother cashed a check and wanted $40K in cash then bank offered a cashier’s check but not the cash. They claimed not to have that volume of cash on-hand. The claim seems odd to me, we’re in a farming community where checks of this size are not uncommon but its odd that banks wouldn’t carry cash to meet the potential withdrawl requirements of their customers.
    If ten customers wanted to withdrawl $10K each on Monday the bank couldn’t comply? They stated that they needed advanced notice for cash withdrawls in excess of $10K. What regulates the cash volume banks carry?

    • 22

      Len Penzo says

      I have a close friend who is a Vice President for one of the biggest banks in the world. I’d bet 4 out of 5 people would be familiar with the bank. Coincidentally, last month I asked him the very same question about bank requirements for keeping cash on hand. I asked him the question because somebody else told me she wanted to withdraw $15k in cash, but was told by her bank that she had to wait several days before she could withdraw that much money in cash.

      According to my VP banker friend, there should be more than $15k in the teller drawers at most large banks at any given time — never mind the cash sitting in their vault. So he was skeptical of her story.

      I asked him how much cash is kept in most bank vaults and he said he didn’t know for sure, but he guessed it was typically high-six figures (minimum), if not a million bucks or more.

      Frankly, I have no reason to doubt that she was telling the truth about being rejected by her bank. It certainly makes you wonder, doesn’t it? I’d certainly be concerned about the soundness of any bank that couldn’t meet such a modest request.

      • 23

        Don says

        Thank you… seems our local banks aren’t the only facilities reluctant to hand over the cash. Honestly that sort of gets under my skin a little more than it should, I “assumed” there would be a regulatory requirement to keep 10% of total value in cash or something similar in the event that people wanted more than $15K in cash.

  11. 24

    Hannah says

    It is true that a customer will be told by their bank that they have to give notice for drawing out a large amount of cash.
    I work for a bank and we don’t carry a large sum in our vault. Also, branch employees have limits on the amount of cash they are allowed to handle, so large withdrawals cause problems with finding a person to approve it, etc.
    Also keep in mind that any amount of cash deposited or withdrawn of 10,000.01 or more will require the bank to fill out a CTR, which reports the transaction to the government.
    My personal opinion?
    Don’t keep all your eggs in one basket. Don’t trust any bank, and don’t keep six figures in a bank account anywhere.
    If you’re blessed to have that much liquidity, spread it around to reduce your risk of having it stolen by bailins or worse.

  12. 25

    Bubba says

    I always say that if the rich went to the bank and ask for all their money they would not get it asap because it`s not there. Fractional reserve started in the 30s. Paper money could end being worthless. That`s what happened to the German economy in the 30s. Man either way we could all be in trouble if money becomes obsolete for a short period of time.

Leave a Reply

Your email address will not be published. Required fields are marked *