Bank Bail In 2016:

Coming To A Bank Near You?

By John Schroder - July 22, 2016 

Over the years we have attempted to assist our clients with ideas and strategies to help them survive in this insane world we live in.  Specifically of course such ideas or strategies that would pertain to their own finances, investments and ability to live free from tyrannies of various shapes and forms.   And one of the most blaring and blatant threats being faced by our clients today is of course the bank bail in paradigm cooked up by the various politicians and central banking minions in an effort to avoid using yet again another tax payer funded bailout of the banking industry (and thus avoid an angry citizenry showing up with pitchforks in hand).  Laws and or various banking regulations were changed in Europe and North America to legally permit this bail in business, and of course it has already been done in Cyprus and more recently Italy.  We think more will come, quite possibly and most probably to a bank near you (if not your own bank where you currently have an account).  That is why it is extremely important to use every legal means at your disposal to protect yourself.  But before we offer up our banking bail in repellent, it is necessary to explain and define exactly what a bail in means and whom legally is at risk.  This is very important to understand because basically the legal definitions are the key to all this and the protection as well.


 It is Easier To Rob By Setting

Up A Bank Than By Holding

Up a Bank Clerk - Bertolt Brecht

What Is A Bank Bail In ?

The bank bailout paradigm is well understood by most people we think.  The government in the jurisdiction where the said bank is located basically is taking tax payer funds to infuse cash directly into the said failing bank.  A bank bail in, on the other hand, is whereby the said bank in trouble is not taking government money but rather getting a cash or capital infusion by raiding the savings and other kinds of accounts of the bank's own depositors.  Innocent people that think they have given their own money to a financial institution for safekeeping in a savings account (and to earn interest, although even that is not the case anymore) only to find themselves the unwitting victims of what amounts to forced confiscation.  But here is the thing: what constitutes the kind or classification of depositor (or bank client) that falls prey to becoming a forced contributor to the said bank's failings?    Is there a difference between different kinds of bank customers legally and otherwise?  Are some bank customers exempt from being financially raped should a so-called bail in occur?

Change Your Account Status To Custody From Creditor !

To answer such questions, this leads us to explain something the average person really has no clue about but should be aware of.  What I am referring to is something known as correspondent banking or otherwise said the account relationship between two banking entities (as opposed to the relationship of the retail bank depositor, which is you).  But to back up a bit, it is important to understand some things from the view of the retail banking customer so he or she can grasp what is really going on and also understand how banking really works between two different banks located in two different countries, and often involving two different currencies as well.

Many retail bank depositors think or believe that when they transfer or wire money from a bank in one country to a bank in another country, that the funds somehow physically are moved abroad to the other bank.  Not at all.  The funds never leave the country but rather are simply reclassified (for lack of a better term) into the account of the recipient bank that happens to have a correspondent bank account inside the same country.  And this is especially often the case if we are talking about moving funds in a currency that is not the home currency of the bank in the other country.  Confused?  Do not be, and allow me to expand on this using an example.

Let us imagine a bank in Italy where a retail banking customer (let us name him Luca) has a savings account.  Luca, being the good nephew that he is, wants to send Euros to his now retired Aunt Lucretia in The Dominican Republic.  Aunt Lucrecia has an account at a bank in the Dominican Republic (where she has retired to a nice condo on the beach) that offers clients savings accounts in the national currency of the Dominican Republic (which is the Dominican Peso) and also offers savings accounts in US Dollars and Euros as well.  How is it possible for the Dominican Bank to process or handle Euros when the official currency of the country is something else?  Very simple.  The Dominican Bank has what is known generally as a correspondent account or more specifically what is often referred to as a Vostro account with a bank inside the European Union.  This account could be with a bank in Italy but not necessarily.  It could be an account with a bank in Austria, France, Spain or any other bank inside the EU that is using the Euro as it's national currency unit.  So, Luca's bank does indeed transfer the Euros but not via Fedex, carrier pigeon nor steamship to the Dominican Republic.  Rather, they will redeposit or transfer the funds to the Dominican Bank's correspondent banking account electronically in Euros to the Dominican Bank's foreign correspondent account in Europe, without ever leaving the EU.

Such an account (the Dominican Bank's correspondent bank account or vostro account with a bank in another country) is what is also known as an omnibus account.  What that means is that the Dominican Bank has an account with the bank in Europe containing say 20 Million Euros.  These funds are being held on deposit or in custody for the Dominican Bank, which in turn has a number of local banking customers in the Dominican Republic with Euro savings accounts at it's bank.  The bank in Europe has no idea who these funds belong to nor do they really care.  Their customer is the bank in the Dominican Republic.  The Dominican Bank of course does know, and indeed has to know, which of it's own customers these funds belong to.  But the key point is, the underlying ownership is NOT disclosed to the bank in Europe and such an omnibus account can theoretically contain the funds belonging the president of a large company in the Dominican Republic, an important politician, a retired German living in the Dominican Republic and anyone else for that matter.  And this process or concept is the same if we are talking about accounts in US Dollars or any other currency for any other bank in another country.

So, what have we learned so far?  A bank in one country that wants to offer accounts denominated in a currency in another country and or simply wishes to facilitate payments and transactions in that other currency will have what is known as a correspondent banking relationship or a Vostro account.  This account will be classified and operated as an omnibus account containing all of the combined fund balances of it's customers undisclosed and unknown who those customers are to the foreign bank holding these deposits.  Think of this as one bank's bank account with another bank elsewhere.  Basically that is what it is but with one small and important catch.  The foreign bank's correspondent account or vostro account is a CUSTODIAN account.

Why is this important to know in terms of a bail in?  Well, unfortunately most people believe or hold the premise that when they have a retail savings account at their local bank that the bank is acting as a fiduciary charged with the safe keeping of the client's money.  Not so my dear friends, at least not in any country that has bail in legislation or regulations in force (and for you folks living in the great white north, I want you to be aware that Canada has adopted the bail in paradigm along with the US, so this is not just Europe that is involved).  You, as a retail banking customer are now an unsecured creditor and your savings account balance considered a loan, legally speaking, to the bank where you made the deposit.  You are a sitting duck, cannon fodder if you will, should your nice local neighborhood bank fall into financial difficulty.  Again, legally they can now do this because your status has been changed by your local politicians (that was very nice of them, was it not?).  They made you an unwilling unsecured creditor when you still think you are something else.

However, vostro or correspondent bank accounts are still custodian accounts and the foreign bank with such an account is NOT a creditor.  In addition, these accounts are kept separate and apart in terms of accounting and access from the retail banking division.  If you walk into a retail branch of any bank, you cannot see or access these vostro or correspondent accounts.  They are held apart and managed separately from the retail savings (and other kinds) of accounts.  So, in terms of our famed bail in scenario, the bank in Italy holding an account in the name of a bank in Singapore, or Canada or The Dominican Republic (or anywhere else for that matter) has a legal responsibility to act as responsible custodian of these funds.

And aside from the legal or classification aspect, correspondent or vostro accounts are money making accounts for the bank holding such an account, plus they certainly tend to hold much larger cash balances compared to even the bank's largest wealthy retail customers.  After all, we are talking about holding the funds of ALL the customers of another bank.  That's a lot of dough, as they say.  But getting back to not only the legal aspects of it, can you imagine a bank in Italy or Germany or France raiding the accounts of another bank in another country to pay for a bail in?     It's not going to happen.  Not only that, imagine if you will a retail banking customer in say Ecuador with a savings account in Euros or US Dollars in his home country.  Such a retail bank client has no idea really what the correspondent relationships of his bank in Ecuador are and nor would he care.  He only knows he has a savings account in another currency with his local bank in Ecuador.  So, IF the foreign correspondent bank (let us say a bank in the US again as an example for US Dollars) holding funds for such a bank in Ecuador was attempting to raid such an account in a bail in action, they could quite literally be taking funds belonging to the President of Ecuador or some other prominent person.  Think about the political ramifications of that.  Remember, these are omnibus accounts, so the underlying clients are unknown and not disclosed.  Therein lies the benefit as they never know who they might be messing with and that can be a good thing for you. 

The Solution: Re-Title Your Money

By now I think you have a good idea what we are suggesting to you as a  bail in repellent strategy.  In Shakespeare's Hamlet, Ophelia was counseled to Get Thee To A Nunnery.  We will not go that far, but simply reword this to suggest you Get Thee To A Bank outside of your home country to keep your Euros or US Dollars on deposit there instead.  And in conjunction with that, a jurisdiction that does NOT have bail in paradigms in place plus has a very solvent local banking industry.  In other words, the idea is to reclassify your money or title your money under the umbrella of a foreign correspondent CUSTODIAN account and protect yourself from bail in robbery.  It is a shame that you would need to do such a thing for protection from your own government and your own domestic bank, but this is the world we currently are living in.