Normally I try to keep things in my life as simple as possible. In a perfect world I would have one brokerage account with an associated bank account. Unfortunately, after seeing many large financial institutions fail or be bailed out by the US taxpayers, I feel much safer spreading my risk around. Not only do I have multiple bank and brokerage accounts in the US, but I also have bank and brokerage accounts in other countries.
If you ask most people if it is legal for a US citizen to have a foreign bank account, they would probably say “no”, and repeat the myth that only tax evaders have foreign bank accounts. This is very far from the truth. Many Americans have foreign accounts even though the reporting requirements that started in recent years has made many banks reluctant to do business with US citizens. In Switzerland, some Americans living there are even having a hard time opening or keeping their bank accounts because some banks don’t want to incur the reporting costs associated with the new US rules. There is even a story about the US ambassador to Switzerland asking more Swiss banks to accept US citizens as customers. This is extremely ironic since it was the onerous regulations and tax-evasion probes that prompted many financial firms to shun American customers in the first place.
Here is the story about it on Bloomberg:
So what does this have to do with me?
I know many are thinking, okay that’s nice to know, but why would I get a foreign account? I have most of my money in nice diverse mutual funds and I even have some international stocks included in the mix so I am completely diversified. Well, yes and no. You may be diversified in your stocks, but you still have the risk of another financial crisis in the US, or any other country for that matter. In other words, this is systemic risk.
You know how you back up the hard drive on your computer to a USB drive or another portable hard drive? If you keep that back up in the same house as the original hard drive are you really diversified? What if someone robs your house and steals the computer and the USB back up, or what if your house burns down? This is the same analogy with US accounts where your accounts are the computer and back ups, but they are in the same house (the US).
This is the part where people’s normalcy bias kicks in and says “This has never happened in the US and therefore never will”. Well I hope it never does either, but I would like to have some protection just in case. Kind of like how you don’t expect your house to burn down but you buy insurance just in case. And just in case you think everything is a rosy as they tell you on TV because the stock market keeps going up, here is an alternative set of facts to keep in mind:
The FDIC (Federal Deposit Insurance Corporation)has about $72.6 billion in its insurance fund. This is 1.1% of insured deposits. The total of all US bank deposits is about $12.5 trillion. This means FDIC insurance can cover about 60 cents of every $100 in bank deposits.
The SIPC (Securities Investor Protection Corporation) covers brokerage accounts. It has about $2.4 billion in its insurance fund. The total amount in all US brokerage accounts is about $16 trillion. This means there is about $1 of protection for every $6666 in your account.
The total US debt is about $19.7 trillion. This is about $60,000 per US citizen or $165,000 per US taxpayer. How is this going to get paid back when, according to the Associated Press, “Three-quarters of people in households making less than $50,000 a year and two-thirds of those making between $50,000 and $100,000 would have difficulty coming up with $1,000 to cover an unexpected bill.”
Now many countries have bail in provisions for banks. This means that when you deposit money in your bank, you are now another creditor to the bank. It’s like saying when you park in a parking garage, you hand over the car keys and title to the parking garage owner and if he can’t pay his more senior creditors, he will just sell your car and everyone else’s car in the garage to satisfy those debts. You probably don’t think that can happen but it already happened in Cyprus in 2013 where depositers lost half of any deposits over 100,000 Euros. It also happened in Poland in 2013 where the state confiscated private pension assets.
Obviously I am not writing this article for the people mentioned above who cannot cover a $1000 unexpected bill. I am writing this for people who are already financially independent or retired. Those people may also need to open a foreign bank account if they want to move abroad or buy real estate in another country. Also, you usually need a bank account if you want to open a safe deposit box in a bank, but that is for another article.
If you decide to open a foreign bank or brokerage account, be aware that as a US citizen you will have to report all the accounts on IRS Form 8938. Also, if the aggregate amount of your accounts exceeds $10,000 in any year, you need to file FinCEN Form 114 known as FBAR. According to the IRS website, as of 2014 there were over 1 million FBAR filings per year so you see that there are many Americans with reasons for having foreign bank and brokerage accounts.
Okay so where should I open an account?
I have opened accounts in Canada, Australia, and Singapore although I would also recommend Switzerland even though I do not have an account there. I opened these accounts in person although some banks may allow you to open accounts online. One bank in Singapore did turn me down because I am a US citizen. I opened these accounts around 2010 and haven’t had any problems with them. If you just want to open an account in one place I would chose Singapore. I would stick to any of the big banks like DBS, OCBC, and UOB. I have a bank account with DBS and brokerage accounts with OCBC Securities and Lim & Tan Securities Pte Ltd. You can open up an account with a nominal amount like $1000 and then wire money in through SWIFT later.
Disclosure: Besides having accounts with the named financial institutions, I am not receiving any money from them nor do I have any promotional agreement with them. Any accounts you open is at your own risk so do your own research before considering doing business with any of these companies.