Bank Failures in the U.S.

Citibank Controversy Puts Dubious FDIC Guarantee Back in the Spotlight

February 25, 2010

Prison Planet.com - The recent controversy surrounding Citibank’s advisory to its customers reserving the right to impose a 7 day restriction on withdrawals from their accounts is a stark reminder of the vulnerability of the fractional reserve banking system and the FDIC’s shaky guarantee that it can insure deposits in the event of a bank run.

Citibank’s notice (see next post) informing its customers of the right to request 7 days notice before funds can be withdrawn from all checking, savings and money market accounts was necessary to ensure compliance with Federal Reserve regulations.

Fox News Business reported on the “little known regulation” yesterday in a piece by Darryl R. Isherwood.

“The requirement is part of Regulation D of the Securities Act of 1933. It applies to all accounts classified as Negotiable Order of Withdrawal [NOW] accounts – basically interest-bearing checking and savings accounts held by individuals and non-profits. Banks are not required to hold reserves in place to cover NOW accounts, so the rule prevents a run on withdrawals for which there are no reserves,” states the report.

For those still unaware of the fact, it may come as a shock that your bank has no reserves with which to cover withdrawals if there was a sudden loss of confidence and a good old run on the bank as has happened on several occasions over the last two years in both the UK and the U.S.

“According to a spokeswoman, the bank changed the status of the bulk of its consumer checking accounts last year to take advantage of an FDIC policy to provide unlimited account protection to certain types of accounts. When Citi transferred the accounts back to their original status, it triggered the notification of the seven-day requirement,” states the report.

Although the FDIC claims it guarantees insurance to the tune of $250,000 per depositor per bank, the rising number of bank failures and those placed on the “problem list” has stoked fears that the tank is running dry.

Alarmingly, The Federal Deposit Insurance Corp. only has about $50 billion to “insure” about $1 trillion in assets across the nation’s financial institutions. This was even admitted in a Yahoo.com article shortly after the collapse of Lehman Brothers in 2008. When Americans realize the fact that banks are “going to run out of money”, the article nonchalantly stated, a run on the banks will accelerate.

On Tuesday the FDIC announced that its deposit insurance fund suffered a whopping $12.6 billion drop in the final three months of 2009 due to accelerating bank closures. “The fund’s reserve ratio was -0.39% at the end of the quarter, the lowest on record for the combined bank and thrift fund,” according to the announcement.

FInancial experts have predicted that the failure of 300-500 U.S. banks would absorb all of the FDIC’s insurance funds. This is precisely why people are worried about banks imposing delays on access to their savings, not as a result of some Internet conspiracy run amok, as the Fox News Business article implies, but as a consequence of the true magnitude of what could plausibly happen in a worst case scenario.

If the U.S. dollar was to suffer a sudden and drastic collapse as innumerable financial experts have predicted and hyperinflation ensued, then being unable to access your money or swap it for another currency or commodity for a period of 7 days could be the difference between preserving your life savings or having them rendered practically worthless.

Imagine if the United States were to suffer a Weimar Republic style collapse and the cost of a pound of butter soared to a million dollars. Generations of wealth could be wiped out overnight if people were unable to access their savings.

It’s no surprise therefore in the current climate that investors have flocked to physical gold and silver bullion not only as a means of preserving their wealth, but ensuring that it actually exists in the first place. With banks affording themselves the power to loan out increasing multiples of what they hold at any one time while the money supply is artificially doubled, being reminded of the fact that our nest eggs consist of nothing more than numbers on a computer screen which can be withheld from us at the discretion of the banks isn’t exactly going to restore trust in traditional methods of saving.

Citigroup Warns Customers It May Refuse to Allow Withdrawals

February 19, 2010

Business Insider - The image of banks locking their doors to keep customers from making withdrawals during a bank run is what immediately came to mind when we heard that Citigroup was telling customers it has the right to prevent any withdrawals from checking accounts for seven days.

"Effective April 1, 2010, we reserve the right to require (7) days advance notice before permitting a withdrawal from all checking accounts. While we do not currently exercise this right and have not exercised it in the past, we are required by law to notify you of this change," Citigroup said on statements received by customers all over the country.

What's going on? It seems that this is something of an error. The seven day notice policy only applies to customers in Texas, Ira Stoll reports at The Future of Capitalism. It was accidentally included on customer statements nationwide.

"Whatever the explanation, it doesn't exactly inspire confidence in Citi," Stoll writes. "But it's hard to believe a bank would be sending out a notice like that on its statements."