Most people never think about opening a bank account in different banks, let alone in different jurisdictions. Rich and wealthy, yes, because the first thing you start to think about once you make some amount of money is how to protect and preserve it. If you are wise about your finances. However, regardless of your financial status, you’re still exposed to a variety of risks, including political, currency and liquidity risks.
We don’t need to go back too much to find the first tragic example. In 2013, Cyprus banks were in real trouble, but people really didn’t realize how big of trouble. The government proclaimed a “bank holiday”, which meant that banks remained closed, accounts were frozen and ATM withdrawals were limited to 100 euros per day. Not only that, but substantial portions of deposits over 100 000€ were also confiscated in exchange for equity in the banks. Banks that were worthless and which shares plummeted in value just after that.
You might think that you don’t have 100 000 euros on your bank account, hence, this doesn’t concern you that much. But what if the next time the threshold is not 100 000€, but 25 000€? Or even less? What if the bank goes under and all is lost? There’s no line which can’t be crossed - all options are on the table, including losing it all. Our intention is not to scare you, but to give you a hyperrealistic view on the safety of your bank and some thoughts to chew on.
This has happened before - in 2008 many banks were under, including behemoths like Lehman Brothers. Governments can’t, shouldn’t and won’t bail out all the banks. For example, in the US, even in a good economical year like 2017, eight banks went bankrupt. Bank failures aren’t as uncommon as people want to think.
In the current crisis caused by the coronavirus, the liquidity of the banks becomes a major issue. Most US banks have less than 4% of client deposits on hand. Citibank, one of the biggest banks, has 2,5% liquidity. This means that if more than 2,5% of all clients want to withdraw their funds, the bank has no money left! All the money is borrowed out to make money for the bank, but these loans aren’t coming back. As you’ve noticed, the world is standing still. If a restaurant has loaned money from the bank and bought kitchen supplies to prepare food and generate cash flow to pay back the loan, but the restaurant is closed, then no one is buying. There are no sales, and there’s no money going back to the bank. This is a huge problem for ALL banks that have very low liquidity.
As seen above with the case of Cyprus, there’s a real political risk for every jurisdiction that has financial problems. And there’s no shortage of countries that have financial problems these days. Still, some jurisdictions are better than others, especially jurisdictions with a strong legal system, and protective measures in place.
Capital controls can happen everywhere, but they’re almost always omnipresent in less democratic countries. And when it comes to protecting your assets from being seized for any reason by your government, it’s a lot easier to do if you have some of the assets in financial institutions outside of your country.
Diversification & currencies
It’s a known phrase that you don’t want to hold all of your eggs in one basket. It’s same with bank accounts and currencies. Especially today it’s wise to hold formidable currencies, but also bitcoin and gold (physical, if possible). Many banks don’t support buying bitcoin - once you buy bitcoin and transfer money from your bank account to a crypto exchange, your account gets shut. Hence, it’s wise to prepare for this scenario, and use a crypto-friendly bank account to invest in bitcoin.
Banks are not your only option
If we talk about Europe specifically, as this is where BankApply mainly operates, then banks aren’t your only option today to be able to transact. In Europe, there are many e-money institutions, or the so-called “online banks”. These are fintechs like TransferWise or N26, and they enable you to transact in the same way as bank accounts do. These fintechs often have lower fees, better user experience and advanced mobile apps. What’s more, you can open your account online, remotely, and do not have to show up to any bank branch to identify yourself. But wait, aren’t these online banks risky to use?
The answer to this is Yes and No. There are well-established fintechs which are profitable, they don’t have loan portfolios (they’re usually not allowed to loan money to clients), they’re well-funded, and some fintechs even have 100 000€ deposit guarantee like conventional banks. Then there are more shady fintechs which aren’t well-funded, they have problems in making their business model work, and hence, have an obvious risk of going under like any business that’s not profitable.
However, this is the part of the due diligence everyone has to make before choosing the banking partner and make the decision based on the obtained information.
How BankApply can help?
BankApply has a database of mainly European banks and fintechs, and we match your profile with suitable banking partners. If you want to buy cryptos, then your profile is matched with crypto-friendly banking options. If you’re a natural person from Indonesia, then your profile is matched with banking options in Europe that accept Indonesian citizens. And so forth.
Essentially, BankApply has done the research for you, and you can review and make your decision where to bank based on your preferences.