The US Banking System is Sick and on Life Support

Fractional banking refers to a banking system where banks are required to hold only a fraction of their deposits as cash reserves. Banks only keep a fraction of deposits, such as 10%, available for withdrawals and payments. The rest is loaned out to earn interest. This allows banks to leverage customer deposits to issue new loans and credit to generate more income from interest. It effectively multiplies how much money can enter circulation, helping to expand the economy as people spend the borrowed money deposited into their accounts.

To mitigate risks, governments usually regulate reserve requirements and guarantee deposits through deposit insurance (like FDIC insurance in the US). The fractional reserve banking system allows banks to earn profits from lending while letting depositors still access funds freely through checks, debit, etc. However, banks run a non-zero risk of insolvency if many accounts are withdrawn at once. Overall, the practice allows more lending/spending than would be possible with a full reserve system. The real situation facing our fractional banking system today is risk. The overall risk of the current fractional reserve banking system is at an all-time high. Since US banks are drowning in unrealized losses on investments and loans, it can be argued that the US banking system is sick and on life support. The banking system is as risky as it has ever been.

Unrealized losses are evident throughout the banking system

Unrealized losses refer to a decline in the value of assets that have not yet been sold by a bank. Banks often hold assets like bonds, securities, derivatives, and loans in their portfolio. If the market value of these assets declines, the bank accrues an unrealized loss. These are “paper” losses only—no actual losses or gains are realized until the assets are sold. For example, if the bank holds a bond with a $100 face value that drops to $80, they have a $20 unrealized loss. These unrealized losses can fluctuate up and down with financial market swings. They may reverse if the assets regain their value before being sold.

Large unrealized losses can be worrying as they suggest the bank may have to realize actual losses by selling devalued assets. This could threaten their capital reserves. This is exactly what happened when the US saw some of the biggest bank failures in its history in 2023. This situation of unrealized losses has gotten much bigger as interest rates have risen dramatically since 2022. Unrealized losses at banks could very well be over a trillion dollars today. Will a black swan event trigger all of these unrealized losses and cause a banking panic or crisis?

Federal Reserve Programs have been providing life support to banks for years

The Federal Reserve (Fed) provides liquidity to banks. The discount window allows banks to borrow money directly from the Fed to meet short-term liquidity needs. Loans typically mature in a very short period. The Fed auctions off short-term funds (typically 28 or 84 days) to banks. This provides longer-term liquidity than the discount window. The Fed coordinates with foreign central banks to offer dollars to overseas banks in exchange for their domestic currency. This provides dollar liquidity through central bank liquidity swaps. The Fed also acts as a primary dealer credit facility. The Fed provides direct overnight lending programs for large broker-dealer banks in exchange for a wider variety of collateral assets. The Fed also purchases Treasury and agency securities to inject liquidity into the banking system indirectly via open market operations. This entire system is sick and the only medication available is more fake money printed freshly up by the Fed. This certainly looks like a banking shell game supported by more mouse-clicked money.

Banks have been falsely propped up since the 1990s and continue to be

Let’s go over some of these fancy names to keep our banks propped up artificially while our system goes deeper into the abyss. The Federal Deposit Insurance Corporation Improvement Act of 1993, The Emergency Economic Stabilization Act of 2008, The Overnight Reverse Repo program in 2013, The Repo Loan Crisis of 2019, The Primary Dealer Credit Facility in 2020, A Standing Repo Facility in 2021, and The Bank Term Funding Program in 2023 all provided liquidity to member banks from Fed accounts where digits magically appeared out of thin air. The Bank Term Funding Program expires on March 11, 2024. What new name and a new way to slow walk the inevitable for these banks will the Fed come up with next? We will soon find out.

JPMorgan Chase and the US Department of Justice know each other very well

JPMorgan Chase has faced five felony counts in six years by the US Department of Justice of criminal banking misconduct and received three deferred prosecution agreements and two non-prosecution agreements. On November 19, 2013, the Justice Department, together with several state attorneys general, announced a stunning $13 billion settlement with JPMorgan Chase for misleading investors about securities containing toxic mortgages. JPMorgan Chase has been penalized for banking relationships with Bernard Madoff and Jeffrey Epstein. JPMorgan Chase was fined $920 million in 2020 to settle allegations that the firm’s traders manipulated the precious metals markets with false trades, an illegal practice called “spoofing.”

Wall Street Banks are protected by Washington DC for serious violations

Executives at megabanks are never held accountable, they just pay a fine. Wall Street banks rig markets and are involved in financial corruption to build the bottom line. The banks don’t care about the American people or the health of our banking system. The attitude of greed and corruption is a horrible way to run a system that is internally sick and on life support.

Megabanks are protected by the courts, Congress, the Justice Department, and the federal prosecutors’ offices across the country as banking executives are never called out for their misconduct. The specific details of the banking violations are never disclosed to the public. How are Americans supposed to fight the corruption between Wall Street and Washington DC? Will the system collapse on its own or will be a coordinated effort to take down the banking system? The answer to both of those questions is yes!

The “Too Big To Fail” Banks are the biggest financial derivative players

A “too big to fail” bank refers to a financial institution that’s so large and interconnected with the overall economy that its failure would be catastrophic. A bank financial derivative is a financial contract or instrument that derives its value from an underlying asset or group of assets. Common types of derivatives banks use include forwards, futures, swaps, and options. They allow banks to manage risk or speculate on underlying assets like currencies, bonds, commodities, and equities. Banks use derivatives primarily for hedging against potential losses. For example, they may hedge foreign exchange risk by entering into currency futures when making loans in foreign denominations. This is a very risky situation and is much bigger than the Great Financial Crisis of 2008.

Trillions in derivatives are controlled by five megabanks

According to the Office of the Comptroller of the Currency, five megabanks or holding companies control $223 trillion of the $268 trillion in derivatives held by all banks in the US. These figures represent 83% of all US bank derivatives in the 3rd Quarter of 2023. These derivatives break down to approximately $54 trillion by JPMorgan Chase, $51 trillion by Citigroup, $42 trillion by Goldman Sachs, $39 trillion held by Bank of America, and roughly $36 trillion in derivatives controlled by Morgan Stanley.

The first Bail-in will cause bank customers to seriously panic

Could a bank take your deposits? The Federal Deposit Insurance Corporation is the backstop and our protection for our bank deposits up to a certain amount. The US does not have an explicit bail-in framework or legislation in place currently. Dodd-Frank legislation from 2010 does give FDIC some powers and tools for orderly liquidation of failing systemic banks, which could involve wiping out shareholders and unsecured creditors. However, these would likely only be used as a last resort.

Typically, the preferred resolution approach for troubled US banks is a traditional bankruptcy process, sale of assets, bridge bank, or bailout by the FDIC. The FDIC has broad powers to keep banks operating while finding a resolution. Bailouts protect depositors and senior debt holders. A full-blown bail-in, where junior or even senior debt is wiped out outside of bankruptcy is seen as less likely, as it could dramatically impact confidence in the wider US banking system. Debt holders might price in bail-in risk and make lending more expensive. Bail-ins are a tool the FDIC theoretically has but a full wipeout of creditors outside bankruptcy would only likely be used only as an absolute last resort if other options failed. Could we ever be in a last-resort situation where all other options fail?

Banks are holding many unrealized losses. As interest rates rise, these losses become greater. When a bank must realize these unrealized losses, they are insolvent. This is exactly what we saw in March of 2023 with many of the largest bank failures in US history. Is there an argument to be made that banks will get stronger? If you consider possible recession, stubborn inflation, higher interest rates for longer, the wrong Fed, empty commercial real estate, and bonds that are losing value, the banking system seems more fragile than ever. Banks will more than likely get weaker, not stronger going forward. An inevitable banking crisis is a direct threat to the safety, value, and privacy of our money.

For those not willing to trust the banking system with all their assets, the option of converting some of those paper assets into tangible assets like gold and silver is a viable, proven option. You can distance yourself from the upcoming banking crisis and hide out in physical precious metals while the rest of the world prays and hopes that their money at the bank is still even there.

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