What would happen if the bank where your savings are goes bust, and the bank where your mortgage is doesn't?

If you want a first hand account, then click here, here or here.  As horrific as a run on a bank is, this is real: my friend in Hong Kong can see the crowds from his office.  If enough people withdraw their money, it doesn’t matter how well-run or profitable a bank is, it has to close and everyone can lose most of their savings.  So this is a wake-up posting to those of us who watched Bear Stearns and Lehman go under with a hint of a “I’m so glad it didn’t happen to me” expression on our faces.  

There is nothing like a big panic for irrational reasons.  What makes this one more important than Lehman going under is that Bank of East Asia are the 3rd biggest bank in Hong Kong (that makes them global size), they have a great balance sheet, have nearly 3x the capital they’re required to have, and have no exposure to sub prime mortgages.  I.e. none of the very real issues that our banks here in Nova Scotia are currently facing. And they still got hit by a run. 

If it can happen there, with those fundamentals, don’t think it can’t happen here.  The people queuing in the street are not wealthy investors, they are hardworking professionals like you and me.  Hardworking professionals who have suddenly decided to take a day off from work, just because they’re afraid of losing everything they worked the past ten years for.  Irrationally yes, but the whole point is that it is not rational for it to happen to a large and sound bank.  What is the news going to bring next? 

As I have mentioned in a previous post, make sure that your bank has CDIC (FDIC if you are American) insurance and that your deposits are covered. It is one thing if the bank that holds your mortgage goes under, it is entirely an other if the bank where you deposit your paycheck goes under. For one thing the bank that holds your mortgage can always find someone to buy the paper as it is an asset that produces income and can be easily sold. 

This is what the average person should do: Make sure that your savings are protected while still maximizing your investment power, your capital is need in the system now more than ever, and by this I mean not under your mattress! Get ready for buying opportunities as the crisis unfolds and the opportunities present themselves news article and the best way to do this is by making sure that your personal balance sheet is lean and your debt are in the process of being eliminated. 

I am told that the Chinese word for “crisis” is the same as “opportunity”. If you think about it, one can not exist with out the other. 

Cheers,

Pat