The Lurking Crisis of Bank Deposits

This is a real concern. If this crisis comes to our shores, we must find a way to be sheltered from its harms. This concept is spreading like wild-fire across the globe.

The Italian banking crisis has moved to its next inevitable stage. European institutions have started to struggle with the question of whether and how to protect deposits in Italian banks. Italy adopted new EU-mandated policies regarding bail-ins in January. The rules for these bail-ins require a bank’s shareholders and debt holders to absorb losses before taxpayer money can be used to assist a bank. Deposits of more than 100,000 euros ($109,000) could be affected, but those containing less than 100,000 euros are protected by European deposit guarantees and cannot be touched. As a result, individuals who hold what they believe to be relatively low-risk investments, as well as small businesses that keep more than 100,000 euros on hand, could be at risk.

As Italy grapples with the new policies, there is a dispute within the eurozone over who should ultimately be responsible for guaranteeing deposits that, under European laws, are protected even in the case of a bail-in. This is a familiar scenario: the EU once again discovers its original dictum would lead to disaster, so it changes its course to find a solution that is acceptable to all members. In other words, we are now at the point of paralysis. But this time it is paralysis over an issue with catastrophic implications.

We can make a distinction between investments and putting money in the bank. Investments are understood to carry with them both opportunities and risks. Putting your money into the bank is not expected to carry either. The benefit of having an individual bank account is to safeguard money. If banks cannot guarantee this safety, then there is little point in putting money in a bank in the first place. In fact, withdrawing funds from an unsound bank becomes a matter of urgency because if enough depositors become uneasy and withdraw their money, the last man to the door may be wiped out. For the middle class, insecurity in banks is an existential crisis.

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