The Royal Bank of Scotlandthis month provided investors with disturbing advice: "Sell everything."
The strategists at RBS are predicting what they call a "cataclysmic year" and they're advising investors to run -- not walk -- for the exits. Meanwhile, Wells Fargo predicted this month that China would continue to cast a deep shadow over the global economy, and Citigroup economists say the cumulative probability of a full-blown recession in 2016 is 65%.
Make no mistake: These warnings come from mainstream analysts, not the usual gang of alarmists on the fringe. If these predictions are even partly correct, several fundamentally flawed but overvalued stocks will collapse.
If you're more concerned right now about return of capital (as opposed to return on capital), you should be asking this question: If markets crash this year and a recession ensues, how safe are the banks?
About 650 banks failed in the immediate wake of the 1929 stock market crash. The number would rise to 1,300 in the following year, adding to the climate of fear in America.
The Great Recession of 2008-2009, which was the worst downturn since the 1930s, saw its share of bank failures as well. Now that the recession is over and the financial services industry is considerably stronger, you might be tempted to think that bank failures are a thing of the past.
Think again. As this chart shows, banks fail all the time, in any given year. But thanks to the efforts of President Franklin D. Roosevelt more than 80 years ago, protections are in place.
At the instigation of FDR, Congress in June 1933 created the Federal Deposit Insurance Corp., which insured customer deposits up to $5,000. Today, that FDIC limit stands at $250,000.
If your bank has failed, don't panic. Since the laissez-faire era that led up to the Great Depression, a complex safety net has evolved over the decades to protect consumers.
The FDIC coverage limit applies to each depositor at each insured bank. For the average retail bank customer, this means the total sum of a single account is completely covered up to $250,000 at each bank. The FDIC defines a single account as checking, savings and CD deposits. Other categories of accounts, such as trusts, joint accounts and retirement accounts each benefit from their own separate $250,000 limits at each bank.
Once a bank has more debts than assets, it's insolvent and therefore qualified for seizure by the FDIC. The FDIC can "sell" the failed bank to a solvent one, by auctioning the bank's assets and liabilities, or it can liquidate the failed bank by breaking up the assets, selling them off in chunks, and then paying depositors from the proceeds.
If depositors are still owed money, the FDIC makes up the difference from it own financial reserves, which derive from premiums the agency imposes on banks in return for the insurance.
If your bank fails, you'll receive an official notice from the FDIC that your bank is closing its doors and your deposit accounts will be shut down. About a week or so after the notice, you'll get a check from the FDIC for your insured money. It's a far cry from the frightening "bank runs" of the 1930s.
Once your bank is shuttered for good, its ATMs will stop working and your check, debit and credit cards with the bank will be inoperable. Any checks that haven't cleared will be returned to you, stamped with the words "Bank Closed."
Know that your loans, mortgages and credit accounts will definitely find a buyer. In the world of banking, debts are regarded as valuable assets and they don't vanish just because the originating bank has.
Don't make a common mistake, which is to blow off your debts and regular payments, just because stocks have tanked and your bank has closed. Rest assured, other people are keeping a close eye on what you owe, so stay on top of your payments. The new owners of your debt will soon contact you with details.
Here's what to look for:
Installment Loans, Such as Mortgages
Your mortgage loan remains in effect with existing balances and original terms intact, but with the new controlling bank now servicing it. Under federal regulations, the new owners have 15 days to notify you.
The bank ownership change won't affect your interest rate and terms of payment, but the name of the payee and the payee's address probably will change. Whether you use digital banking or mail paper checks via the postal service, make sure that you send the payments to the correct destination, with checks made out to the correct entity.
Federal law mandates a 60-day grace period after the transfer of bank ownership during which you can't be charged a late fee by the bank if you mistakenly send a mortgage payment to a wrong address or online destination.
Checking and Savings Accounts
Interest rates, fees and terms can all change. Scrutinize minimum required balances -- maybe your old bank didn't require them or they were low and now your new bank isn't so generous. Don't take anything for granted. If you don't like what you see, then shop around for a new bank.
Revolving Credit, Such as Credit Cards
Unlike your installment loans, the terms of which are nailed down, your new bank can change just about all aspects of your credit cards and lines of credit -- the whole gamut can be dramatically transformed, including interest rate, credit limit, due date, fees and grace period.
The Royal Bank of Scotland is warning investors that we face a "cataclysmic year." If this dire prediction comes to pass, you need to be forewarned about a certain group of weak stocks that are the worst places for your money today. In a market crash, you don't want to be left holding the bag. Click here now for a free report that lists these dangerous stocks, so you can either avoid or sell them now.
John Persinos is editorial manager and investment analyst at Investing Daily. At the time of publication, the author held no positions in the stocks mentioned.