If you ask any number of Americans to tell you if they believe their bank accounts are protected, a modicum of the group will reply that the Federal Deposit Insurance Corporation (FDIC) backstops their money and accounts up to $250,000. However, if you push the envelope a little further and ask them if the FDIC has any other function, they will stare blankly at you and perhaps mumble that they are simply another government agency with only one specific purpose.
This however is no longer true, and in fact, the FDIC has taken on a much larger role. Back in 2012, the FDIC met with the Bank of England in a joint conference to hash out the framework for bail-in procedures should not only banks go insolvent, but also should there be a sovereign debt default in the wake of a financial collapse. And perhaps most importantly for the common man and individual, the FDIC now has the power to write down your account without ever having to compensate you through promised insurance as they were required by law prior to this conference, and the passage of Dodd-Frank.
So… if a large bank fails in the US, the FDIC steps in and takes over, replacing management, and works to shrink the bank by writing-down liabilities and converting debt into equity.
In other words… any liability at the bank is in danger of being written-down should the bank fail. And guess what? Deposits are considered liabilities according to US Banking Law and depositors are creditors.
So… if a large bank fails in the US, your deposits at this bank would either be “written-down” (read: disappear) or converted into equity or stock shares in the company. And once they are converted to equity you are a shareholder not a depositor… so you are no longer insured by the FDIC.
So if the bank then fails (meaning its shares fall)… so does your deposit.
Just as Congress removed the primary Depression Era law that protected the U.S. banking system from greedy and speculatory entities, so too has it summarily removed depositor protections that were put in place 80 years ago to provide security for individuals holding money in a financial institution. And with global debt at all-time highs, and default rates growing so fast that central banks are instituting negative interest rates in an attempt to stave off trillions in defaults, how much can you trust the solvency of both banks and governments, who have ensured through legislation that you and I will be the ones who go broke, while they remain too big to fail?