What are the alternatives?
Uninsured non-MFI depositors have three broad choices.
- They can move their deposits to a bank they feel is safe. This may reduce a specific risk, but does not eliminate depositor risk, bearing in mind that all G20 jurisdictions will substitute uninsured non-MFI deposits for tax-payers funds in a bank rescue.
- They can spread their deposits between several unrelated banks so that each one is insured. This may be a practical solution for deposits up to two or three times the insured level.
- They can reduce their deposits by acquiring something else.
The first two options need little further comment, but the third must be explored further. Physical cash is an option but impractical except for relatively small amounts, because most governments have moved to restrict its use by the imposition of anti-money laundering and other rules. The two further alternatives are to invest in securitised alternatives, such as government bonds and other instruments, or in precious metals. And in the case of precious metals, there are mining shares, ETFs and possession of physical metal.
The case for precious metals
The fact that the BIS feels it has been necessary to co-ordinate G20 nations into a common approach to bank rescues using uninsured non-MFI deposits is evidence that bank failures capable of threatening the global financial system are definitely an on-going risk. The central banks will have calculated that raiding this category of deposits is a matter of expediency, and any run on deposits out of vulnerable banks can be contained by central banks acting as lender of last resort. This is based on the simple fact that either deposits are moved around the system, or when they are drawn down in favor of something else, the money released remains in the banking system. However, raiding these deposits is only an interim solution, because the underlying assumption is that the financial condition of the whole banking system does not deteriorate further.
It is not the intention of this article to argue for or against this assumption, beyond pointing out that the BIS approach is merely a stop-gap solution that does not deal with underlying economic and financial problems. The difficulties governments face cannot be resolved by just applying sticking plaster on insolvent banks.
Depositors are learning that governments, acting in the name of the tax-payer, will do anything for their own survival, debasing savings to cover state spending and now raiding deposits to maintain the status quo. Many depositors take the view that holding short-dated government bonds and similar assets priced on the bank of interest rates is risky, which is why they have money on deposit. It is therefore very likely that deposit money will flow into precious metals.
It was with this in mind that GoldMoney was set up more than 10 years ago to provide a safe haven from both banking and currency risks. It was recognised that in the event of a system-wide financial and banking crisis, finding a genuinely secure safe-haven is not easy.