The sub-prime catastrophe has spread far beyond the United States. It's hardly beyond the realm of plausibility that offshore banks could be affected.
That concern came into particularly sharp focus last week, when Switzerland's largest bank, UBS AG, said it expected to write off a staggering US$40 billion in sub-prime losses.
So far, financial regulators have succeeded in preventing a widespread banking panic. The closest we've come to that nightmare scenario is in the United Kingdom, where the government nationalized Northern Rock Bank after a run on the bank by depositors last September. Not to mention last month's mysterious acquisition by JP Morgan-Chase of BearStearns.
It remains to be seen whether regulators can continue to sweep multi-billion-dollar problems in financial portfolios under the rug through expanded borrowings, selective capital injections, or further nationalizations. But if you have substantial assets in any bank—offshore or onshore—you don't want to wait for the regulators to act. You should take action now to assess the safety of the assets held in your accounts.
The assets in your account at any bank are either on or off the bank's balance sheet. If they are on the balance sheet, and the bank becomes insolvent, those assets are at risk. Your funds may or may not be protected by a national deposit insurance scheme. If they're not, you're simply another unsecured creditor of the bank.
Assets that are on the bank's balance sheet include checking accounts, savings accounts, money market accounts the bank operates, "unallocated" holdings of precious metals, and (at some banks) CDs. The basic operating account for a bank (called a current account, giro account, or other names) is also on the balance sheet. At offshore private banks, this operating account is the springboard for all other investments.
When you purchase securities—stocks, bonds, mutual funds, etc.—through your offshore account, the bank establishes a "safe custody" account for these investments. Those assets are off the bank's balance sheet. Precious metals the bank holds for you in "allocated" storage are also off its balance sheet.
Naturally, investments in safe custody are subject to market risk, but they won't be affected if the bank becomes insolvent. However, if your offshore bank goes belly up, it will likely be part of a larger economic catastrophe that would decrease the value of any securities portfolio. Also, there may be a period of time where the securities an insolvent bank holds in safe custody can't be traded.
I'll be discussing additional ways to protect yourself from catastrophic losses in your bank accounts, both domestic and offshore, in an upcoming issue of The Sovereign Individual, the members-only newsletter for The Sovereign Society.
Copyright © 2008 by Mark Nestmann
Comments