Don't Trust Your Bank

Doc's note: For decades I've told readers the same thing... No one – not Big Government, not Big Pharma, not Big Banks – will take care of you. You can only take care of yourself. You are the only one with your best interests at heart.

Today, our global-living expert Kim Iskyan explains why it's time to stop trusting your bank and the No. 1 way to protect yourself from a banking crisis...

The biggest money problem that most people face – or rather, think they face – is not having enough of it.

And one of the great lies of life – right next to "You learn from your mistakes" and "You always get a second chance" – is the idea that once you have enough cash, your money problems are over.

The reality is that people with enough money (however that's defined) have a new problem: how to keep their money safe.

You might think the answer is simple: Put it in a bank. Job done. Right?

Do you really trust the financial system?

Here's how most of us think the banking world works... We put our money in a bank and assume that it will stay safe and that the bank will give us our money back whenever we ask for it... We also assume that the people running the bank aren't taking crazy risks with our cash... that the financial regulators are keeping banks honest... and that the value of the currency in which we hold our assets won't plunge.

But that's not always how it works.

In 2015, when the Greek economy was on the brink of collapse, a run on the banks caused ATMs around the country to run out of cash before the banks eventually closed for several weeks.

Right now in Venezuela, people wait in long lines outside banks just to withdraw the equivalent of $0.20 (the maximum withdrawal amount).

You might think that couldn't happen in places like the U.S. or the U.K.

But it's a big risk to assume that your money is safe. If you don't take the right steps to protect your assets, the other parts of your big-picture plans – like a second citizenship, or traveling, or investing internationally – won't help much.

Having money creates options... losing your money eliminates them. And if you don't have decades to earn it all back, losing it isn't an option.

The Answer: Diversify

There are ways to limit the risk that your bank goes bust, that a systemic banking crisis wipes out depositors, or that the currency in which you hold most of your assets devalues dramatically.

You can spread your money around in different banks. For example, keeping the amount you have in any one bank under the $250,000-per-depositor Federal Deposit Insurance (FDIC) limit. This is the maximum amount the FDIC insures if a bank fails.

You can become an amateur banking analyst and learn about the capitalization ratio and the solvency ratio to better understand the safety of your bank. You can put your money in systemically important banks that are "too big to fail" to improve the odds that, in a five-alarm banking system crisis, you won't lose everything.

If you think the U.S. is immune to banking failures or systemic crises... think again.

Since 2001, there have been 561 bank failures in the U.S., according to the FDIC... That includes the biggest bank failure in American history – the 2008 collapse of Washington Mutual Bank – with $307 billion in assets. (That's as much as State Street Corp., America's 11th-largest bank, has today.)

No banking system is bulletproof.

And perhaps the biggest risk – as a U.S. bank account owner, denominated in U.S. dollars – is the future value of the U.S. dollar. The explosion of the Federal Reserve's balance sheet, and the flooding of the global economic system with upwards of $5 trillion in COVID-19 stimulus cash over the past year, is steadily undercutting the value of the dollar.

Just because you think, live, and invest in one currency, that doesn't mean you should hold only that one currency... In fact, it means just the opposite. Just like you wouldn't put all of your money in a single stock, you shouldn't have all of your money in a single currency. Overweighting your home currency is a sure sign of home-country bias.

The answer – the only way to really reduce the risks of a banking and financial system, and an easy way to own other currencies – is to diversify where you bank. Diversification works for reducing risk to a single stock or sector or market... and it works for your cash, too.

Diversify With Offshore Banking

To many Americans, offshore banking has a vaguely illegal ring to it... as if it's the domain of Russian oligarchs and Columbian drug lords on exotic islands in the middle of the Pacific.

The reality is a lot less exciting – though much more useful – than Jason Bourne-meets-Narcos. Offshore banking is simply using a bank that's outside your home country... quite literally, off the shores of wherever you are. And if you cross your Ts and dot your Is – which isn't as difficult as you might think – there's absolutely nothing illegal about it, either.

Where should you start? First, remember that your aim is to diversify and not add risk to how you manage your cash. So just like stuffing your stock portfolio with penny stocks is a lousy way to reduce the risk of your blue-chip portfolio, opening a bank account in a country with poor rule of law, an inept banking regulator, and a weak currency is precisely the wrong way to diversify. When you're looking for an offshore bank, focus on predictability and safety.

If you hold a U.S. passport, your range of offshore banking options is limited because Americans aren't welcome in many jurisdictions. Due to the voluminous paperwork imposed by the U.S. government on foreign financial institutions that have U.S. customers, many offshore banks don't take Americans – at all.

As you consider where to open an offshore bank account, it's worth keeping in mind a few questions...

  • What will you use it for? If it's just to stash some cash outside of the U.S. financial system and the U.S. dollar – money you won't need anytime soon, and as a kind of financial system "insurance policy" – go for the vanilla option. Fancy structures in faraway places are going to be expensive, and probably a lot more than you need.
  • Do you need to go there? Some banks require you to open a bank account in person. That's fine if you were already planning to visit Tbilisi (the capital of the country of Georgia, bordering northeastern Turkey, between the Caspian Sea and the Black Sea) for some Georgian wine and khachapuri (a centerpiece of Georgian cuisine)... But if not, it's a whole lot less convenient. Some banks require nothing more than an Internet connection and a wire transfer to open an account.
  • What currencies can you hold? Some banks allow you to hold a rainbow of currencies in a single account. Others might only offer accounts in the local currency. Determine in advance what you need.
  • What documentation will you require? Banks everywhere are bureaucracies – and regulated by even bigger bureaucracies. Any bank will do a lot of KYC – Know Your Customer – to be sure that you are who you say you are... and that the money that you'll be depositing is "clean." It's helpful to find out in advance what you'll need to present to open an account – a list that might include evidence of income, proof of address, citizenship or nationality, a letter from your local (home) bank, and recent tax returns.

Where to Bank Offshore

Even if you hold a U.S. passport, there are still plenty of offshore banking options. Some to consider include...

  • Canada: Canada isn't exactly the most exotic offshore banking locale. But it's relatively quick and easy – and close. Bank of Montreal ticks all the boxes: Different currency, different banking system, and they take Americans. You'll need to cross the border to open an account – which might be the biggest challenge, as the U.S.-Canada border is still closed to non-essential traffic because of the coronavirus. (Note: BMO Harris Bank, which is an affiliate of BMO, is a U.S. bank... holding an account there won't help you escape the clutches of the American financial infrastructure.)
  • United Arab Emirates: First Abu Dhabi Bank, in the United Arab Emirates, is a well-capitalized bank in a jurisdiction that's become a magnet of capital. You'd need to visit Dubai or Abu Dhabi in person to open an account, and prepare to stay a while to shepherd through the paperwork. But they take Americans... and it's a very safe place to park some cash.
  • Hong Kong: Hong Kong's Monex Boom Securities is an online brokerage house that allows you to buy securities in a dozen – mostly Asian – markets, as well as the U.S., and hold cash in six different currencies. Monex Boom – owned by a Japanese financial group – isn't a bank, but it offers a lot of the benefits of financial sector and currency diversification that is part of the appeal of offshore banking. Opening an account is relatively straightforward – and doesn't require you to go anywhere.
  • Singapore: Singapore's DBS Treasures is great – if you have $250,000 to open an account. Based in Singapore, DBS routinely wins "best bank" awards from the financial media and is one of the world's safest banks – in one of the world's best banking environments. It's not cheap or easy, but you can't go wrong with DBS.
  • Georgia: TBC Bank in the country of Georgia is off the beaten track. And maybe because of that, it's a good option as an offshore bank. It's well-run and is more tech-savvy than many American banks (and its holding company is a traded stock on the London Stock Exchange). You can chat online with customer service – in English – and you'll get all your questions answered immediately. Yes, you have to go there to open an account – but Georgia is a wonderful country, and you'll be happy you visited (and got a new bank account as a bonus).

What You'll Need to Tell Uncle Sam

Just like the U.S. government requires foreign banks to tell it what American citizens are doing, Uncle Sam also forces Americans to tell it what they're doing on the international banking front.

If you hold more than $10,000 in a foreign bank account – or that sum in total across all of your foreign financial accounts – you need to tell the IRS about your foreign financial accounts through what's called the Foreign Bank Account Report (FBAR) form – also called FinCEN form 114. You'll need to itemize and detail your accounts and provide a figure for the maximum balance during the year.

The filing deadline for the FBAR is generally the same as tax day (usually April 15, but extended to May 17 this year). But you can file as late as October 15 without needing to request an extension. (Note that you may also need to mention on schedule B of your 1040 the country or countries where your foreign accounts are located.)

And, of course, any interest or dividend income, or capital gains, that you receive in your offshore accounts are subject to U.S. taxation.

Offshore banking isn't easy or straightforward. But if you're looking to get some money out of your home country banking, financial, and currency system, there's no better way than to open an account somewhere else. Diversification pays – if for no other reason, for peace of mind.


Kim Iskyan
March 25, 2021