There are a lot of people questioning whether their money is safe at a bank during a recession. It’s a very real concern and one that needs to be discussed.
KEY TAKEAWAYS
- More than 500 banks in the US failed from 2008 to 2015
- There are many variables to consider when determining if a bank is safe
- Most international deposit insurance schemes are worthless during a sector-wide crash
- It’s important to look for fiscally responsible countries with well-managed banks
Is Your Money Safe in a Bank During a Recession?
Whether your money is safe in a bank during a recession depends on several factors. Most important of these factors are the bank, country, and currency. We’re going to explain these for you below along with steps you can take to protect your money.
It’s should be no surprise that the most important factor determining the safety of your money is your bank. In fact, you might be surprised to hear that there are other factors you even need to consider. Well, there are. But banks are at the core of whether your money is safe.
We’ll be helping you understand the specific signs you need to look out for to make sure that you’re banking with a safe bank with strong financials that isn’t going to implode during the next crisis. Sound good?
Feel free to use the table of contents to jump ahead to the sections most relevant to you.
Table of Contents
- When Is the Recession Coming?
- How to Tell If Your Money Is Safe During a Recession
- What About Deposit Insurance?
- What if You Bank in a Country Without Deposit Insurance?
- Banking During a Recession
- How Can You Get Started Opening Accounts Today?
When Is the Recession Coming?
First of all, no one can tell you with absolute certainty when a recession is going to strike. But one thing is certain… recessions do strike.
Markets are cyclical.
In the US, recessions historically come every 7 to 10 years. And it has now been 13 years since the end of the last one, in 2009. So, get ready. Whether you like it or not, the economy is eventually going to take a dive.
Most of the talking heads are suggesting that a recession will hit the US in 2023. That means you can still prepare and take action now to protect yourself and your money.
And that’s really what this article is all about…
Regardless of the type of risks facing you – social, economic, legal, or financial, there are always steps that you can (and should) take to ensure your money is secure.
As for how and where the next recession will impact you the most, there are hundreds of variables that will play into that equation.
Importantly, it also depends on where you live, work, what industry you work in, where you hold your money, what investments you have, and many other factors.
And while you can’t always recession-proof every aspect of your life, we can help you insulate yourself from serious banking failures and financial risks that most people miss.
In the next section, we’ll share a few steps that you can take right now to protect yourself and ensure your money is safe, no matter what happens next.
But, before diving in, if this is your first time visiting GlobalBanks, don’t forget to download your FREE Non-Resident Banking Starter Guide. It’s designed to help non-residents open safe international bank accounts in top banking hubs around the world.
How to Tell If Your Money Is Safe During a Recession
The great thing about banks is that nearly everything you need in order to determine related risks is publicly available (if you know where to look and how to interpret the numbers).
Yes, that can be time-consuming, annoying, and – unless you have a team of banking experts on staff like us – it can be a very boring venture.
But, if you really want to know whether your bank will be safe during a recession, that’s where you have to go to find the answer.
That said, the principles of how to keep your bank deposits safe during a recession are the same at any other time in an economic cycle.
So, regardless of whether we are in a recession now or in three years, the biggest risks to you are the same:
1) Bank Risk:
Is the bank safe?
2) Country Risk:
Are there country risks, exchange controls, or crazy laws? (e.g. South Africa, Lebanon, or Argentina)
3) Currency Risk:
Are the currencies you hold stable reserve currencies or currencies that are being printed into oblivion that no other government wants?
Please note: We’re only talking about bank deposits. Determining whether or not your investments will be safe during a recession is a much bigger question that goes way beyond the scope of this article.
Of course, even when it comes to banking there are additional risks you need to consider as well.
But, generally speaking, finding and keeping your money at banks with sound financials that won’t expose you to regulatory, financial, investment, operating, currency, or country risks is key.
Here’s a quick snapshot of each risk and what it means:
Is The Bank Safe?
When trying to determine if a bank is safe there are a range of variables to consider. For the purpose of this article, we’re going to focus on top-line financial considerations. To do this, you want to assess two things, solvency, and liquidity.
If a bank is solvent, it has a reasonable amount of funds available to cover its depositors and creditors if some of its assets go bad. To calculate a bank’s solvency ratio you simply divide a bank’s total equity by its total assets. You want to see a solvency ratio of at least 10%. Higher is better.
In addition to solvency, you also want to check the bank’s liquidity, as expressed through the amount of depositor money the bank keeps in cash and other liquid investments. This is one of the most important indicators of a bank’s health. It reflects a bank’s ability to withstand any major withdrawal demands from depositors, also known as a “run” on the bank.
In other words, the bank should have enough cash and cash-like investments to cover short-term demands from depositors. To calculate a bank’s liquidity, simply divide the total cash and cash-like assets by the total deposits due to customers. Again, we like to see at least 10% of all deposits kept in cash and cash-like assets, though this should be looked at in conjunction with solvency. And, like the solvency ratio, higher is better when it comes to liquidity.
Is The Country Safe?
The country you choose to bank in is just as important as the actual bank, perhaps even more so. The country dictates the domestic requirements, which can have a dramatic impact on the stability of your bank and can impact your money.
When choosing a banking hub, check to see if the total deposits in the country’s banking sector far exceed the country’s annual GDP. If so, this makes it very difficult for the government to bail out the banking sector if there is ever a major shock or catastrophe in the country’s financial sector.
Another consideration is whether the country has introduced bail-in legislation. If so, and you have deposits in the bank, you are on the hook as a depositor if the bank ever faces foreclosure. This is shocking on many levels, not the least of which is the additional moral hazard that it introduces to the banking sector.
Lastly, when considering a country, you should be aware of any legislation that restricts your ability to move money in or out. Commonly referred to as foreign exchange controls, these can often lead to heavy taxation on your funds when you’re looking to move them abroad, which is critical during a country-wide bank failure as it can add administrative requirements to a time-sensitive withdrawal.
What About Deposit Insurance?
Many people mistakenly think that because they have a bank account in a country with “deposit insurance,” they don’t have to worry about banking risks.
Depending on the country, this might be true. But, any country facing a sector-wide banking crisis would have a hard time meeting all depositor claims. So, relying solely on deposit insurance to protect your money is flawed thinking. This is especially true when dealing with smaller jurisdictions and economies that don’t have their own currency or central bank.
But it’s not just the small countries that are at risk. Larger countries would be faced with major challenges trying to meet deposit demands in a widespread banking collapse as well.
For example, the US has over $17 trillion in customer deposits. But, the FDIC only has about $125 billion in actual reserves (to pay depositors if their bank fails). That’s less than 1% of total US deposits. Of course, the FDIC only insures up to $250,000 per depositor, per bank.
Like the FDIC, many deposit insurance schemes around the world are designed to bail out depositors in case of an occasional bank failure. They operate on the assumption that only a handful of banks will ever fail at one time. That means, the system can’t cover depositors if there’s a financial catastrophe or economic collapse and more than 1% of depositors lose their money.
These deposit schemes are not designed to actually backstop the banking sector. They are designed to give depositors the feeling that “safety” exists. It’s providing a false sense of security, based on false numbers. But it can also act as a backstop when only a small number of banks collapse. So, deposit schemes are useful but it would be foolish to only rely on deposit schemes to protect your money.
Let’s take a look at two very different examples of deposit insurance now…
USA Deposit Insurance
The Federal Deposit Insurance Corporation (FDIC) in the United States ensures that depositor bank accounts in the United States up to US $250,000.
But unfortunately, the FDIC only has enough money to cover 1% of the total deposits in the banking sector.
If there is a systemic shock to the system, deposit insurance in the United States can’t give everyone their money back.
Now, it’s important to remember that banks fail all the time. We talked about this in more detail in our recent article about banking failures.
And when it comes to normal operating conditions, the FDIC and other deposit insurance schemes around the world, are well-positioned to protect depositors during those “regular” times.
But when it comes to a recession, the situation is different. And the question of whether the money in your bank account is safe during a recession becomes more real.
From 2008 to 2015, more than 500 banks in the US failed. By comparison, Singapore has never had a bank failure…ever.
Many people are left wondering whether or not they should bother opening an account in the US at all. If you’re purely looking at US banks as a place to protect your wealth long-term, you’d be right for worrying.
While we wouldn’t recommend keeping your life savings in US banks (especially during a recession), banks in the US are still a great choice for day-to-day, transactional banking. Likewise, many US banks offer access to sophisticated financial services that can be extremely useful for both consumers and businesses.
Lastly, while US banks have their shortcomings, they are still significantly better than banks in other countries around the world.
UAE Deposit Insurance
In the midst of the 2008 crisis, Sheikh Mohammed, the Prime Minister of the UAE and Ruler of Dubai, told his cabinet that “we are determined to protect our financial and banking system out of keenness to preserve the interests of our country and people.”
The UAE federal government literally insured the country’s entire banking sector against any failure. In plain language, the UAE government guaranteed 100% of deposits and savings in all national banks, inter-bank lending operations between banks operating in the UAE, and that no UAE national bank would be exposed to credit risk.
The UAE government was prepared to inject sufficient liquidity into the financial system whenever necessary.
Clearly, the difference between the USA and the UAE deposit insurance programs is the fact that the UAE was willing to provide a safety net for the entire banking sector. Plus, the UAE, unlike the US and many other countries, had the financial resources to back it up.
In fact, there aren’t many countries in the world that can afford to offer such protection to depositors.
That’s one of the reasons why you need to carefully consider the safety of the banks and the country you’re banking in.
What if You Bank in a Country Without Deposit Insurance?
By now, you probably recognize that we don’t put much value on deposit insurance. And there’s a good reason for that…
Instead, we prefer to look for fiscally responsible countries with conservative banks that are well-managed, have solid financials, and don’t make risky investments. Though the risk banks take on is not only about volatility. As demonstrated by recent banking failures, when banks make investments that do not reflect sound liquidity management practices it can also inject substantial risk into a bank.
Banking During a Recession
There are rock-solid banks around the world with extremely conservative financials ready to help you (and your money) weather any storm. But, these banks are hard to find and often require substantial deposits in order to initiate a relationship with the bank.
Not surprisingly, these banks don’t advertise their services on billboards or bus shelters. They don’t need to. They have more customer demand than they currently accept. This allows them to be very selective about who the accept as customers.
If you’re interested in opening accounts with these kinds of banks, we’ll explain how you can get started below by leveraging our team’s expertise. But, you can also start doing your own research right now.
Start by using the risk metrics that we’ve outlined above and look at the banks you currently have accounts with. This is a great way to get started and will give you a sense of your current risk exposure.
Then, depending on what you find, you might want to consider opening new accounts to either decrease your risk or simply diversify away from your existing risks. You can do this by opening accounts in a different country or simply opening accounts at safer banks.
Most importantly, if you do bank in a country with deposit insurance, you should never keep more than the insured amount at any one bank. You can diversify your money across multiple banks and have them all insured, just in case. Not doing this is irresponsible and puts 100% of your money above the insured limit at risk.
How Can You Get Started Opening Accounts Today?
If you’re ready to take action and start opening international accounts now, you can access GlobalBanks IQ, our dedicated international banking intelligence platform.
GlobalBanks IQ gives you everything you need to start finding and opening accounts for you or your business today.
When you join GlobalBanks IQ, you immediately unlock the GlobalBanks Database of international banks — home to 250+ banks in 50+ countries.
And, you get access to our library of advanced (members-only) reports, including proven account opening strategies, country-specific banking options, and lists of banks for specific client types.
Plus, you unlock our account-opening checklists, dedicated account-opening alerts, and much more.
To get started, click here to see if GlobalBanks IQ is the right choice for you to start accessing the benefits of international banking today.
You can also view all of the account opening solutions offered by GlobalBanks on our products page.
