This is not your parents’ era where there were no worries about the money in the bank being at risk. It is important to understand what is being contemplated to save those “too big to fail” banks. Don’t think that local banks are isolated. When I was in banking, I studied and analyzed the operations of the “Cash Desk” where Fed Funds (excess bank cash on hand) were traded on a daily basis. I would buy $10 million from a community bank, packaged it up with other community bank Fed Funds purchases and sale up to $250 million of Fed Funds overnight to a NY money center banks such as Chase Bank. The next morning the funds would be returned to us, then the community banks. Then the process would start all over. On Friday we would sell for 3 days to cover the weekend. What would happen if a Black Swan event happened on Friday night? On Monday, all the downstream banks would be out of cash. Oops!
Resolving Globally Active, Systemically Important, Financial Institutions
A joint paper by the Federal Deposit Insurance Corporation and the Bank of England
10 December 2012
From the FDIC Paper Executive Summary:
In the U.S., the strategy has been developed in the context of the powers provided by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Such a strategy would apply a single receivership at the top-tier holding company, assign losses to shareholders and unsecured creditors of the holding company, and transfer sound operating subsidiaries to a new solvent entity or entities.
As a depositor, you are an unsecured creditor. Think about it. What is your tolerance for risk?