What is Backing Your Deposits in Your Bank?

The answer to the question in the title is for all practical purposes "NOTHING."  And, of course, therein lies the problem with where you bank.  Because U.S. banks are no longer required to hold any of their deposits in reserves.  I would gather that the vast majority reading this post did not know that.

The following excerpt, which you just might want to read, is taken from Risks in Banking from Bob Prechter's Conquer the Crash:

"Between 1929 and 1933, 9000 banks in the United States closed their doors.  President Roosevelt shut down all banks for a short time after his inauguration.  In December 2001, the government of Argentina froze virtually all bank deposits, barring customers from withdrawing the money they thought they had.  Sometimes such restrictions happen naturally, when banks fail; sometimes they are imposed.  Sometimes the restrictions are temporary; sometimes they remain for a long time.

Why do banks fail?  For nearly 200 years, the courts have sanctioned an interpretation of the term “deposits” to mean not funds that you deliver for safekeeping but a loan to your bank.  Let’s repeat that in another way.  Your bank balance, then, is an IOU from the bank to you, even though there is no loan contract and no required interest payment. Thus, legally speaking, you have a claim on your money deposited in a bank, but practically speaking, you have a claim only on the loans that the bank makes with your money.  If a large portion of those loans is tied up or becomes worthless, your money claim is compromised.  A bank failure simply means that the bank has reneged on its promise to pay you back.  The bottom line is that your money is only as safe as the bank’s loans.  In boom times, banks become imprudent and lend to almost anyone.  In busts, they can’t get much of that money back due to widespread defaults.  If the bank’s portfolio collapses in value, say, like those of the Savings & Loan institutions in the U.S. in the late 1980s and early 1990s, the bank is broke, and its depositors’ savings are gone."

Make sure you check out to see what bank in your state is the safest.  You just might want to check these banks out.