If you are serious about managing your personal finances, you are probably thinking of reducing your expenses in order to save more. You may have traded in your vehicle for something more affordable and need cheap temporary car insurance companies for the time being. Cutting your expenses is still within your boundary; however, protecting your savings and retirement benefits may be beyond your control.
Many people think that saving their money in a bank is the safest way to protect their money. Little did they know that being a depositor is also being a creditor, too, in the eyes of the law.
Keep in mind that creditors are subject to the changing policy of central banks and of the government. When there is financial crisis, banks may face the risk of bail-ins.
How Do Bank Bail-Ins Affect Your Savings and Retirement?
In countries where the crisis is being addressed with central bank intervention, there are two common measures being implemented by the government. The first one is through quantitative easing or low interest rates. The second method is through bail-ins.
A bail-in simply means to restructure the liabilities of a distressed bank and to recapitalize them in order to resolve the risk of bankruptcy. As a result, the government or the central bank will force the banks to convert their creditor’s claims into shares.
This means that you as a depositor are seen by the law as a creditor. Your bank deposit is considered an unsecured deposit, and is subject to conversion into shares of stocks of that particular bank. If your retirement or pension money is in one of these such banks, your money is locked until the bank may recover from this financial crisis.
In this case, you can’t withdraw your money nor expect your annual dividends because dividends are decided in annual stockholders meetings. The problem is that distressed banks that are under recapitalization are less likely to declare dividends sharing at the moment. In other words, you should protect your savings and retirement from bank bail-ins.
How to Protect Your Money from Bank Bail-Ins
1. Spread Your Money Across Different Banks and Countries
If you have a pension, choose the most stable bank for it. For the rest of your savings, you can divide them and spread them across many different banks.
If possible, deposit some of your money in some banks in other countries that have less risk of bail-ins. Diversifying your portfolios will reduce the risk of losing all your money.
2. Avoid Risky Investments
You should also avoid investments in which there is a counterparty risk. Examples of such investments are exchange-traded funds, mortgages, time deposits, and specific stocks.
You can invest some of your money in preferred stocks as there is a fixed dividend and a guaranty that your investment will be bought back to you, or invest in government bonds.
3. Monitor the Stability of Banks
Before you open an account at a bank, it’s a must to do your research to check for stability. What’s important is to get reliable data that will tell whether or not the bank is stable. If it’s unstable, it will have heavy exposure in risky investments such as foreign exchanges and derivatives.
Protecting your savings and your retirement depend upon your decision to choose which bank you should deposit your money. Never forget that your savings and deposits are unsecured, so there is a risk of losing them in the hands of the bank you have chosen. Therefore, do not risk your retirement funds in unstable banks.