How Safe Are the Banks?
“In our opinion it is just a matter of time—a relatively short time—until there is a general worldwide run on the banks, with virtually all banks closing.”—When Your Bank Fails, by Dennis Turner.
“The banking system is completely safe. We have in place the mechanisms to take care of any problems, large or small, that might arise.”—William Isaac, former chairman of Federal Deposit Insurance Corporation, quoted in U.S.News & World Report.
FEW people store money under the mattress anymore. Aside from the danger of loss due to fire or theft, money thus stored is stagnant. It does not increase in amount and will most likely decrease in value because of inflation or devaluation of currency.
To increase one’s savings, money must be put to use. The means most widely accepted and used—both for safekeeping and for profit—is the banks. But how safe are they? As shown by the earlier quotations, there are widely divergent views.
Is There Reason for Alarm?
“The entire world banking system is very much interrelated,” points out David Rockefeller, retired chairman of Chase Manhattan Bank. “Necessarily, banks do a lot of business with one another, so there is tremendous interdependence.” As a result, no bank or nation really stands alone. So whenever a bank fails, there is concern that it may pull other banks down with it or reduce the confidence so essential to the banking industry. The possibility then exists that depositors elsewhere will rush to withdraw their funds and thereby cause the downfall of other banks in an uncontrolled domino effect.
Is there a chance that a bank collapse somewhere could pull down the international banking system? “The regulators in the U.S. and other countries are sure to take strong steps to prevent any major failure that appeared imminent,” says Rockefeller. “I think it is most unlikely that it will happen.”
So far, even though there have been some serious problems and failures around the globe in recent years, the governments have stepped in to bail out their troubled financial institutions. “The finance ministers and the bankers are more than ever haunted by the specter of 1929, and they will do everything they can to avoid a repetition of the financial catastrophe that happened fifty years ago—with the more or less conscious hope of avoiding its seemingly inevitable result, world war,” explains the French weekly L’Express. Still, there is reason for concern.
The Debt Problem
Banks are inherently a risky business. They handle large amounts of money that is mostly not their own. Additionally, they create money and make loans far in excess of their net worth. While they may take adequate precautions, the banks know that some loans will turn bad. Therefore a certain amount is set aside as loan reserves to cover bad debts. But if an unusual number of loans turn sour, those reserves will not be sufficient to cover the large loan losses, or a run on the bank. “The more equity that’s at risk because of bad loans, the weaker the bank gets financially,” states New York magazine. “Bankruptcy (or failure) occurs when all the bank equity is used up.”
More and more banks today are finding themselves in just that position—too many of their loans are turning sour, and there is insufficient capital to back them up. The reasons given are legion: the oil crisis, trade restrictions and deficits, downturns in the economy, unstable interest rates, capital flight, inflation, disinflation, recessions, overly aggressive lending policies, corporate bankruptcies, fierce competition, deregulation—even ignorance and stupidity.
But there are ways to stay alive—on paper. Rescheduling the loans, stretching the debt over a longer period, is one means used and reused. Another is to list the loans at full value, though there may be little hope of having the principal paid in full. An oft used tactic is to lend the borrowers more money so that they can make their interest payments.
All these methods are currently being used by banks in regard to Third World debt, considered by many to be the greatest threat to the stability of the international banking system. According to a World Bank survey, the external debt of over a hundred developing nations reached a combined total of some $950 billion at the end of 1985, an increase of 4.6 percent over the previous year. Although already too large, it is expected to reach $1.01 trillion by the end of 1986. Why? Because many of those nations simply cannot repay and are pressing for more time and money. Taking into account the enormity of their loans, the banks have complied. As one person puts it: “If I owe you a dollar, I am in your power; but if I owe you a million, you are in my power.”
Always looming ahead is the possibility that some deeply indebted nations, tiring of the hardships of austerity programs, may just decide not to pay at all. The banks cannot force sovereign states to pay. “For banks, the meaning of the global debt crisis is simple,” states Savvy magazine. “They earn most of their profits by making loans, and if countries cannot repay their huge loans, banks’ profits, capital bases, and stock prices could fall precipitously. . . . Significant Third World defaults could stretch the financial system to the breaking point, possibly resulting in the collapse of major banks.”
A default by just four nations—Mexico, Brazil, Argentina, and Venezuela—could bring about the collapse of the nine largest U.S. banks, experts warn. “That actual defaults have not taken place is remarkable,” states The New York Times Magazine. “One could, of course, attribute it to semantics. Just as wars are no longer ‘declared,’ no one is now declared ‘legally’ in default.”
“Is My Bank Safe?”
Can one tell if a bank is strong and solvent? “For most depositors it’s difficult or impossible to find out what shape a bank” is in, states the magazine Changing Times. Adds The New York Times: “Recent experience has shown that it is extremely difficult for outsiders to judge the soundness of a bank. Practically every large bank that collapsed in recent years, or nearly collapsed, had been highly touted by bank-stock analysts. . . . Even bank regulators and auditors were unable to detect serious troubles until it was far too late.”
Usually the most a customer does is examine the bank cosmetically: the types of services offered, the friendliness and speed with which he is served. In fact, where banks advertise, it is usually those things that they emphasize—the friendly banker, the quick loan, special accounts or services, convenience. Sometimes gifts are offered to lure in new depositors. But little is said about the financial standing of the bank. Of course, a bank’s services are important. Also to be noted is the interest given and how it is compounded, as yields will vary. Of utmost importance to the depositor is the safety of his money.
Here, deposit insurance is the key. “Because of deposit insurance, unless there is an utter collapse of the banking system these are the problems of bankers and bank stockholders, not depositors,” says The Atlantic Monthly. “It is extremely unlikely that bank failures today could bring thirties-style losses of life’s savings to individuals.”
So it is good to check if accounts are insured and by whom. Government insurance, of course, is best. An example of this is the Federal Deposit Insurance Corporation in the United States. Some who were told that their accounts were insured later found that it was by a private agency with insufficient funds to repay all depositors when the bank failed. Check also the amount insured. If your account exceeds that limit, consider opening accounts in other banks so that all your money will be covered.
What Lies Ahead?
Individual bank failures are expected to continue and the number may even rise. Yet, what is of utmost importance to the banking system is that confidence in it be maintained. “A crisis would occur only if depositors interpreted these financial lurches as a reason to withdraw their money from the affected banks,” states Fortune magazine. Therefore, all-out efforts are being made to strengthen the system and keep that confidence strong.
Plans are also in motion to reduce the debt of Third World countries to manageable levels and aid them to meet their obligations. “In the final analysis, the enormous financial deficit will be absorbed by the taxpayers worldwide,” states Albin Chalandon, former French Minister of Industrial Planning.
How safe, then, are the banks? One bank official put it this way: “The banks are as safe as the governments that back them up.” While that may seem reassuring now, it gives thinking persons reason for pause. Why? Because the Bible foretells the complete destruction of all earthly governments and their replacement by the everlasting Kingdom of God. (Daniel 2:44) And it points to events of this 20th century as marking the conclusion of the present system of things.—Matthew 24:3, 6, 7, 21, 22.
The Bible tells about people, at that time, throwing even their gold and silver into the streets as valueless to save them. (Ezekiel 7:19; Zephaniah 1:18) Since that will be true of these more precious substances, what trust can be placed in national currencies or in the financial institutions that depend on them? Gone will be the governments that back them up!
So Jesus aptly cautioned: “Stop storing up for yourselves treasures upon the earth, where moth and rust consume, and where thieves break in and steal. Rather, store up for yourselves treasures in heaven, where neither moth nor rust consumes, and where thieves do not break in and steal. For where your treasure is, there your heart will be also. . . . You cannot slave for God and for Riches.”—Matthew 6:19-21, 24.
[Box on page 9]
The Banking Situation—What Others Say
● “It is no overstatement to say that the governments of dozens of debt-ridden nations, the International Monetary Fund, the Federal Reserve Board, and hundreds of American and foreign banks together face the severest and broadest financial crisis since the 1930s.”—New York magazine.
● “Present policies provide only a most precarious protection. The world’s financial safety is balanced on a knife-edge. The debt crisis threatens not only development in developing countries but also the stability of the banking system of industrial countries.”—Report by a Commonwealth group of experts, The Guardian of London.
● “The immense debt owed to the banks of the United States by third-world nations is poised like a potential avalanche above the American banking system.”—The New York Times Magazine.
● “The total global debt is so massive that it has laid the groundwork for a first-rate debt crisis in the international banking system.” “The supreme irony of the global debt crisis is that the banks are in so deep they can’t get out without bringing down the whole house of cards.”—Savvy magazine.
● “The situation today is more critical and more dangerous than it was in the 1930s.”—West German economist Kurt Richebächer, U.S.News & World Report.
[Chart on page 10]
Seventeen Heavily Indebted Developing Countries
Country Foreign Debt Percent Owed
($ in U.S. billions) Private Sources*
Argentina 50.8 86.8
Bolivia 4.0 39.3
Brazil 107.3 84.2
Chile 21.0 87.2
Colombia 11.3 57.5
Costa Rica 4.2 59.7
Ecuador 8.5 73.8
Ivory Coast 8.0 64.1
Jamaica 3.4 24.0
Mexico 99.0 89.1
Morocco 14.0 39.1
Nigeria 19.3 88.2
Peru 13.4 60.7
Philippines 24.8 67.8
Uruguay 3.6 82.1
Venezuela 33.6 99.5
Yugoslavia 19.6 64.0
Total 445.9 80.8
Mostly commercial banks
Source: World Debt Tables, 1985-86 edition, published by The World Bank, Washington, D.C.
[Picture on page 8]
If many big banks fail, a domino effect might cause the collapse of the whole banking system