What happened in Cyprus could happen herePublished 4:59pm Tuesday, April 2, 2013
To the editor:
The recent fiasco in Cyprus on their bailout plan to save bankruptcy has opened the eyes of many of us who have blind faith in the banking system.
Who would ever thought that a bank could “tax” (take) any of your money sitting in an ‘insured” bank account. If it could happen in Cyprus it’s theoretically possible it could happen anywhere. Do I think it will happen in the US? I seriously doubt it. But let’s look at the facts of life about banking.
As a depositor you might be surprised to learn that you are legally considered a ‘’creditor’’ of your bank rather than a customer who has trusted the bank with your money for safekeeping, but that seems to be the case. In most legal systems, the funds deposited are no longer the property of the customer. The funds become the property of the bank, and the customer in turn receives an asset called a deposit account (a checking or savings account). That deposit account is a liability of the bank on the bank’s books and on its balance sheet. Because the bank is authorized by law to make loans up to a multiple of its reserves, the bank’s reserves on hand to satisfy payment of deposit liabilities amounts to only a fraction of the total which the bank is obligated to pay in satisfaction of its demand deposits. The bank gets the money.
The depositor becomes only a creditor with an IOU. The bank is not required to keep 100 percent of the deposits available for withdrawal but can lend them out, keeping only a ‘’fraction’’ on reserve, following accepted fractional reserve banking principles. This is limited to, for immediate payout, usually about 5 percent of the banks legal obligations. When too many creditors come for their money at once, the result can be a run on the banks and bank failure. Yes, FDIC insurance does limit your “potential” loss, but it may take a long time to even recover those limited funds.
Don’t you just love the banking system. You’d almost think they were the federal government based on their ability to take your money without you having immediate recourse.
– Karl Kachadoorian, Tryon