Capital controls are financial mechanisms governments use to keep money from fleeing offshore during times when a currency or banking system is under extreme duress. Thus it is a very disturbing scenario when on Sept. 10, the FDIC voted 5-0 to institute a form of capital control when it decided to no longer provide deposit insurance for cash held outside the country, even if it is in American owned banks.
Starting today, following a 5-0 vote by the FDIC, depositors in foreign US bank branches will officially no longer have recourse to a $250,000 in deposit insurance. The notional amount of deposits at risk: $1 trillion. This is not a new development: the FDIC rule to curb insurance on this category of deposits was proposed earlier this year, and today was the formalization. - Zerohedge
This move by the FDIC follows in the wake of foreign regulators, primarily in EU controlled regions, instituting their own forms of capital controls on depositors. When Cyprus experienced deposit confiscation earlier this year to help 'bail in' their troubled banks, the government immediately instituted a limit on how much money depositors could withdrawal, forcing individuals to not only lose up to 60% of their money, but no longer have free access to it as they saw fit.
The FDIC's new policy is not the only capital control mechanism the U.S. has implemented on the American people since 2008. In 2012, Congress passed Senate Bill 1813 (Highway trust fund), which carried an amendment to allow the government to put a hold on anyone seeking to leave the country if they had a tax debt of $50000 or higher.
As we move towards October, where the debt ceiling and threat of Fed tapering brings a liquidity crisis back into play, the FDIC appears to be making a preemptive move towards limiting its insurance exposure, should any bank lean towards insolvency, and trigger a run on deposits. By removing its obligation to pay deposit insurance for overseas money held in American banks, it will force depositors to evaluate whether they can live with the risk of a future bank default, or having to move their money back to the U.S., where many more restrictions could be legislated by the government.