The FDIC is no longer just an insurance agency, but the primary executor for the bail-in process

If you ask any number of Americans to tell you if they believe their bank accounts are protected, a modicum of the group will reply that the Federal Deposit Insurance Corporation (FDIC) backstops their money and accounts up to $250,000.  However, if you push the envelope a little further and ask them if the FDIC has any other function, they will stare blankly at you and perhaps mumble that they are simply another government agency with only one specific purpose.

This however is no longer true, and in fact, the FDIC has taken on a much larger role.  Back in 2012, the FDIC met with the Bank of England in a joint conference to hash out the framework for bail-in procedures should not only banks go insolvent, but also should there be a sovereign debt default in the wake of a financial collapse.  And perhaps most importantly for the common man and individual, the FDIC now has the power to write down your account without ever having to compensate you through promised insurance as they were required by law prior to this conference, and the passage of Dodd-Frank.

Title II of the Dodd-Frank Act provides the FDIC with new powers to resolve SIFIs [systemically important financial institutions] by establishing the orderly liquidation authority (OLA). Under the OLA, the FDIC may be appointed receiver for any U.S. financial company that meets specified criteria, including being in default or in danger of default, and whose resolution under the U.S. Bankruptcy Code (or other relevant insolvency process) would likely create systemic instability.

[In the US] Title II requires that the losses of any financial company placed into receivership will not be borne by taxpayers, but by common and preferred stockholders, debt holders, and other unsecured creditors, and that management responsible for the condition of the financial company will be replaced…

[In the UK] The introduction of a statutory bail-in resolution tool (the power to write down or convert into equity the liabilities of a failing firm) under the RRD is critical to implementing a whole group resolution of U.K… But insofar as a bail-in provides for continuity in operations and preserves value losses to a deposit guarantee scheme in a bail-in should be much lower than in liquidation. Insured depositors themselves would remain unaffected. Uninsured deposits would be treated in line with other similarly ranked liabilities in the resolution process, with the expectation that they might be written down.

— Zerohedge

So… if a large bank fails in the US, the FDIC steps in and takes over, replacing management, and works to shrink the bank by writing-down liabilities and converting debt into equity.

In other words… any liability at the bank is in danger of being written-down should the bank fail. And guess what? Deposits are considered liabilities according to US Banking Law and depositors are creditors.

So… if a large bank fails in the US, your deposits at this bank would either be “written-down” (read: disappear) or converted into equity or stock shares in the company. And once they are converted to equity you are a shareholder not a depositor… so you are no longer insured by the FDIC.

So if the bank then fails (meaning its shares fall)… so does your deposit.

Just as Congress removed the primary Depression Era law that protected the U.S. banking system from greedy and speculatory entities, so too has it summarily removed depositor protections that were put in place 80 years ago to provide security for individuals holding money in a financial institution.  And with global debt at all-time highs, and default rates growing so fast that central banks are instituting negative interest rates in an attempt to stave off trillions in defaults, how much can you trust the solvency of both banks and governments, who have ensured through legislation that you and I will be the ones who go broke, while they remain too big to fail?