Your Bank Account, Not The Government, Will Be Bailing Out The Big Banks When We Crash

Some of you may not remember the announcement made by Goldman Sachs last year, so allow me to refresh your recollection.  In early 2016, Goldman Sachs announced that it was entering the online banking market, offering bank accounts that don't require a minimum deposit, with no transaction fees.  Clearly, Goldman wants the retail market money.  

While many hailed their entry into the market as an opportunity, I viewed it quite skeptically, especially in light of the recent history in Cyprus.  But, before I go into my perspective regarding this decision as being quite suspect, allow me to provide a bit of the background that is shaping my overall thinking.

Market History

Back in 2007, the S&P500 hit a high of 1576SPX.  In 2017, we are now 65% higher than the high struck in 2007.   That means we are significantly well above the highs struck by the overall stock market before the financial crisis hit the markets in 2008.

Now, feel free to take a look at the banking ETF XLF.  You will see that it has not yet even been able to exceed the highs it struck in 2007.  Even if you look at Goldman Sachs, one of the leading banks, you will see that only recently was it able to make a marginally higher high over that struck in 2007. 

Now, take a look at one of largest banks in the United States - Bank Of America.  Shockingly, BAC has still not even retraced 50% of its financial crisis plunge.  And, amazingly, it represents approximately 11% of all deposit money in the United States.  In fact, if you look at Citigroup, it has barely even retraced 10% of its financial crisis fall.

While we certainly do have some banks that have exceeded their per-crisis highs, like JPM and WFC, ask yourself what such general underperformance is telling you about some of our largest banks.  Furthermore, consider that the top 10 banks still control approximately 45% of the total bank deposits in the United States, with Citigroup (4%) and BOA (11%) representing approximately 15% of that 45%.

What rights do you have to your bank account?

Let’s go through a little background so you understand the relationship that you, the depositor, has with your bank.

Most Americans use bank accounts to pay our bills, as well as a depository for our excess funds. What most people do not understand is that when we give our money to the banks via deposits, we are actually giving that bank a loan.  In other words, we become unsecured creditors of the bank, and the bank provides no security the loan will be paid back. Should the bank default, depositors will stand in line with the rest of the bank creditors to receive pennies on the dollar through the bankruptcy process.

Now, many think that this is not an issue since the FDIC guarantees bank deposits up to $250,000.  So, believe their money, up to that amount, is secure. This is a reasonable belief when individual banks run into problems, but it is not a reasonable belief during times of systemic stress.

In 2009, when there was a tremendous amount of stress on the banking system as a whole, the FDIC Insurance Fund fell into a deficit of almost $21 billion. Yes, the supposed "backstop" had a massive deficit, raising questions about how much you should rely on the FDIC during a major crisis.

What does Cyprus have to do with all this?

So, what does Goldman's recent decision have to do with all of this? Well, when we consider what occurred in Cyprus several years ago, it may open some eyes.

During the Cypriot financial crisis several years ago, there was no bailout being offered to banks (reasons for which seem to have been political in nature). As a result, two of the largest banks were on the verge of closing. Ultimately, Laiki Bank had to be wound down, and the depositors of that bank lost most of their uninsured savings.

However, the Bank of Cyprus, rather than wind down as well, entered into a restructuring, and utilized the cash held from depositors for the funds needed to effectuate the restructuring. The depositors were issued shares in the newly restructured bank in return for their deposits which were used for the restructuring.

Let me state that I do not believe we are on the cusp of a major banking crisis such as the kind seen in 2008 just yet. However, my long-term chart of the S&P 500 suggests that it’s within reason that we could see another such crisis, and potentially one that is worse, once we turn the corner into the 2020s. That means that Goldman and the other major banks have at least three to four years to build their common depositors’ base.

My regular readers know I am not a tin-foil-hat type.  But, let's first assume I am correct in my expectations for another major banking crisis in the not-too-distant future, especially for the weaker of the larger banks. Let's further assume that, rather than a bailout being offered by the government again, the powers that be determine that a Cyprus-style "bail in" would be the preferred path, as the country likely does not have the stomach for any further bail-outs to the big banks.

Do we begin to see the light as to why Goldman wants to increase the deposits it holds within its “virtual safes”?  While many consider them the “smartest in the room,” they certainly seem to be preparing for this potential scenario down the road.

What a ‘bail in’ means

There is one more point that should be understood. As far as I know, we still do not have any laws in place which authorize the Cyprus-style "bail-in" scenario. While that does not mean that one may not be passed when an emergency situation arises, we currently do not have a mechanism to legally effectuate and enforce such a "bail in" on depositors.

As a former lawyer with a significant amount of mergers-and-acquisitions experience, I also want to point out that depositors would be better served by bail-ins as compared to the bankruptcy option, and would probably prefer it. Under such extreme circumstances, a "bail-in" at least preserves the "good" assets of the bank and gives them future hope of being able to recover more of their losses than they would have otherwise had to recognize under the bankruptcy option.

The bankruptcy alternative truly leaves them nothing in their unsecured status, so providing a restructuring using a "bail-in" type of scenario places them in a better position than as a standard unsecured creditor would hold.


There could very well be many business reasons as to why Goldman has now moved down the path of opening its vaults for mass deposits. But when considering where I view the market several years down the road, along with the lagging long-term charts of the bank stocks, one has to consider the Cyprus-style potential "bail-in" scenario a little more seriously.

Ultimately, one must consider whether they even want to place money in the large banks to begin with, considering the potential risks being alluded to within the long-term charts. Being forewarned means you are forearmed, and you can seek out a safer depository for your cash reserves well before any crisis strikes.

Why is any of this important to you right now?   Well, even though I believe we will still have several more years ahead of us before a major financial crisis strikes again, I think it is always a good time to understand the risks coming down the road.   So, consider this your early warning.

Avi Gilburt is founder of