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FDIC
- US Federal Deposit Insurance Corporation
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John
Schroder answers some commonly asked questions about offshore Investments
and Banking
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FDIC - It's not what
you think it is...
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Since the majority of people are
primarilly concerned about bank safety and insurance, let us explore this
area first. Almost all countries, whether a tax haven or not, have
some form of central banking system in place. In addition, jurisdictions
such as Panama, the Dominican Republic or the Bahamas, also have some very
stringent government oversight of the banking industry. The
system may be slightly different that the US system, but that does not
mean that strength of the banking industry is compromised as a result.
Many countries also have very strict laws in place, that also threaten
a bank's management with considerable jail time if funds are mismanaged
or if the bank develops certain kinds of probelms. I make this point
as a stark contrast to the savings and loan debacle in the US a few years
back. Many bankers that did outright stupid things with depositor
funds went off to play golf, while the FDIC and the American taxpayer picked
up the bill. Most people do not know that a large number of zero
coupon bonds had to be issued in order to prop up the insurance fund people
have come to believe in. These bonds will be coming due and your
taxes are paying for it, not the people that created the problem.
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Americans often want to compare
a foreign banking system to their own by asking if bank insurance is in
place in the country where they wish to do business. Some countries
do have formal government insurance programs, while others address this
issue by requiring that the banking institution keep a deposit on hand
with the central bank (which often is calcualted as a percentage of customer
deposits). Let us compare this to the American FDIC program and other
US requirements. Most people do not know that the reserve requirement
was actually lowered, not raised, in order to free up more bank funds and
offer additional liquidity to the banking system. While you may think
this is a good thing ~ would you prefer to bank in a country where less
than 2% of your money is put aside for safekeeping (that the bank cannot
use for loans or otherwise) ~ or would you prefer to bank where the government
has mandated that up to 7% of your funds are put on deposit with the central
bank?
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FDIC insurance also may not be what
you think it is. As an insurance program, it was a very good idea
for the protection of depositors. As an insurance company run by
the government, the rules that apply to private insurance companies are
not applicable. For example, private life insurance companies in
the US are required to have assets or deposits equal to 102% of their liabilities.
This means if an insurance company has 10 clients, each with a $100,000
life insurance policy, they must by law set aside or prove that they can
pay the claims of their clients ~ stated another way ~ 102% of one million
dollars. If you think that the FDIC has liquidity right now to pay
off the depositors in the event that say just 15% of all US banking institutions
failed next week, think again. This is not an attack on the FDIC
program. Again, it was a good idea, but it is more of a psychological
security blanket than a financially sound reality. Since you read
your life insurance or other policy to know your coverage, why not read
the FDIC insurance policy from your local bank. As a depositor, you
have the right to see the policy and read it. It is almost guranteed
that most people do not. If more people did read it, I am sure when investigating
offshore banking ~ they would not ask if an offshore jurisdiction had FDIC
coverage ~ but instead ask if the banking requirements from a particular
jurisdiction are in fact better.
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I think most Americans really have
no idea what FDIC is or how is works. Also, many Americans always
want to use FDIC as a point of reference with regards to safety of banks
or banking outside of the US. However, the reality is that FDIC is
an illiquid insurance company (if it were a private insurance company,
it would be broke and unable to provide the insurance vs. claims) and I
dare to say, a PONZI scheme as well. In addition, even though other
countries do not have the exact same kind of system in place, they might
have another, which actually guarantees a higher level of solvency for
the banking system in its own country than what FDIC provides in the US.
For example, as of March 2002, the bank insurance fund only has US$1.24
to cover each US$100 of insured deposits. So, if you want to
make a comparison perhaps to the Dominican Republic, whereby the Central
Bank requires that banking institutions post reserve requirements ranging
up to 20% (for certain kinds of unsecured loans, such as outstanding credit
card balances), the reality is that the Central Bank of the Dominican Republic
has perhaps up to 10 times the reserve deposits and coverage that FDIC
has (taking an average).
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The following chart taken directly
from the FDIC website indicates that the Bank Insurance Fund ONLY has 1.24%
coverage and that this is in fact below the 1.25% minimum reserve ratio
THEY have established (so they are below their own minimum guidelines).
In short, how well do you feel knowing that the FDIC can only payout US$1.24
for each US$100 you have on deposit with your local US bank (should your
bank go under)? Only you can answer that, but I certainly am not
thrilled about it.
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http://www2.fdic.gov/qbp/grgraph.asp?rptdate=/qbp/2002mar
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Also, we have talked about a very
real banking crisis once again in the US, and the numbers do not lie.
The following chart was revised June 12, 2002 and highlights that bank
failures are once again on the rise after leveling off from the last banking
crisis in 1999. In fact, the following chart indicates that 6 banks
have already failed this year, and that 124 are in crisis (or are having
financial difficulty). Of this total (6 that have failed plus the
124 in crisis), the total assets of these banks are, US$54 Billion Dollars.
By the FDIC’s own accounts, they only have US$30 Billion in the fund as
of MARCH 2002 (plus an additional US$11 Billion is the Savings Bank Fund,
bringing the grand total to US$41 Billion). Therefore, if we take
for granted that this small number of banks and financial institutions
out of 9,000 something covered by FDIC end up going south, the FDIC insurance
fund is once again bankrupt, as it was in 1995. In other words, if
one assumes that FDIC might have to bail out ONLY 130 banks as of TODAY,
and pay off US$54 Billion Dollars to depositors, with only US$41 Billion
in the kitty, you can do the math. Interestingly enough, this is
a small number of the total 9,000 something institutions guaranteed by
(or supposedly guaranteed) by the FDIC. So, 130 banks go under, FDIC
is wiped out (again), which leaves no money for the deposits in the remaining
9,000 banks, credit unions, etc.
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http://www2.fdic.gov/qbp/2002mar/all1.html
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The additional written commentary
about the state of banking in the US, for the first quarter ending March
2002 is here as well (written by the nice folks at the FDIC themselves).
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http://www2.fdic.gov/qbp/2002mar/qbpall.html#1
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Bottom Line, how do you know your
money is safe with FDIC? The honest answer is, FDIC is yet another
US government run program that is broke, but there is always the US taxpayers
who can bail them out (again). Meaning, many say, the US government
would never allow the FDIC to go on without money – which is probably an
accurate assumption to make. However, we are talking about what is
a PONZI scheme in such a case (which is supposedly illegal for everyone
else, except the US government). Allow me to explain.
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To elaborate on what was stated
earlier - Back in the early 1980’s the FSLIC was broke, in fact beyond
broke, the were in the red. In other words, they had no money – we
cannot state it any plainer. What did the government do? Issue
what were called REFCO bonds, or additional debt to bail out the insurance
fund, so bank account depositors at the failed banks could be paid off.
Who bought the bonds? US taxpayers and other bank depositors in many
cases. So, you got your money back, but you then end up paying taxes
in the future to pay off the bonds, so what are you doing in reality?
Borrowing the money from your self in the end later on, in order to pay
yourself off today, or we can say to get your money back from the failed
banking institution. That is what a PONZI scheme is, using new money
or money from other people in order to pay off the previous people or older
investors. The FDIC bank insurance fund is supposed to be funded
by insurance premium payments the banks pay, presumably out of profits
or as a general business expense, just as banks pay for other kinds of
insurance on an annual basis (fire insurance on the bank branch building,
etc., etc.) However, it is quite obvious they are not paying enough
for whatever reason (political pressures to keep the premium payments low
no doubt) and thus the fund remains virtually insolvent in comparison to
its potential obligations. So, just a short twenty years later,
no one has learned any lessons from this – and life goes on in the pass
everything along to the taxpayer accounting game. This, whether you
have come to realize it or not, is how most of the government managed programs
work.
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Is
is Legal for a US citizen to have an Offshore Bank Account?
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We often get this question and the
answer is Yes ~ it is perfectly
legal for a US citizen to own an offshore bank account, offshore annuity
policy or offshore mutual fund. The only stipulation is the
folks at the IRS want to make sure they know about it, so you can pay taxes
on the interest or earnings. Since many offshore banks or investment
firms do not report customer account information to foreign tax authorities
(or their own government for that matter), it is the responsibility of
the account holder to do so.
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For additional information regarding
tax-free offshore mutual funds and bank accounts, please contact us.
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