What Will Happen When Banks Go Bust? Bank Runs, Bail-Ins and Systemic Risk

ScheerPost ^ | 2/23/23 | Ellen Brown

[EBH]

Fortunately, bail-ins do not apply to deposits under $250,000, which are protected by FDIC insurance. That is true in theory, but as of September 2021, the FDIC had only $122 billion in its insurance fund, enough to cover just 1.27% percent of the $9.6 trillion in deposits that it insures. The FDIC also has a credit line with the Treasury for up to $100 billion, but that still brings the total to just over 2% of insured deposits.

If just one or a few banks become insolvent, the FDIC fund should be sufficient to cover the insured deposits (those under $250K). But under the 2005 Bankruptcy Act, derivatives creditors (which are considered “secured”) are first in line to recover the assets of a bankrupt bank; and the Dodd-Frank Act followed that practice. So if a bank with major derivatives risk collapses, there might be no bank assets left for the non-insured creditors; and a series of major derivative cross-defaults could wipe out the whole FDIC kitty as well.

As of May 2022, according to the most recent data from the Bank for International Settlements (BIS), the total notional amounts outstanding for contracts in the derivatives market was an estimated $600 trillion; and the total is often estimated at over $1 quadrillion. No one knows for sure, because many derivatives are “over the counter” (not traded on an exchange). In any case it is a bubble of ominous size, and pundits warn it is about to pop. Topping the list of U.S. derivatives banks are J.P. Morgan Chase ($54.3 trillion), Goldman Sachs ($51 trillion), Citibank ($46 trillion), Bank of America ($21.6 trillion), and Wells Fargo ($12.2 trillion).

[EBH]

On Nov. 9, 2022, the FDIC held a 3.5 hour webcast discussing the bail-in process among other topics. In a clip raising alarm bells in the alternative media, Donald Kohn, former vice chairman, Board of Governors of the Federal Reserve System, said, “…it’s important that people understand they can be bailed in. But you don’t want a huge run on the institution. But they’re going to be…”

Richard J. Herring, co-director of The Wharton Financial Institutions Center said, “I would think your strategy ought to be to disclose as much as possible to people who professionally need to know about it …”

Gary Cohn, former director of the National Economic Council, said, “I almost think you’d scare the public if you put this out — like, ‘Why are they telling me this? Should I be concerned about my bank?’ … I think you’ve got to think of the unintended consequences of taking a public that has more full faith and confidence in the banking system than maybe people in this room do …we want them to have full faith and confidence in the banking system. They know the FDIC insurance is there, they know it works, they put their money in, they get their money out…”

This was followed by some laughter, which critics have interpreted as a cynical agency warning the wealthy while leaving the smaller investors to eat the losses, similar to the phone calls to the favored few before the 1929 stock market crash. But the clips have to be taken in context. Here is that whole section (taken from the video transcript beginning at 1 hr. 15 min)

[Jonty30]

Same thing that happened in China before the government cracked down.

[EBH]

FDIC Systemic Resolution Advisory Committee - November 9, 2022 Webcast

https://youtu.be/0PtULsOtI2o

WARNING: 3 HOUR MEETING

[whitney69]

We have had this problem before. The last one happened on October 24, 1929.

wy69

[Robert DeLong]

Problem is, will an FDIC bailout even be worth it? The money may be seen at its true worth, or worthlessness, as the case will be.

At this point in time, the fiat currency is becoming somewhat akin to a Ponzi scheme, and if they introduce a governmental digital currency, its nothing more than an open opportunity to confiscate the money of every citizen.

You'll have nothing, and you won't be happy.

[EBH]

I think you’ve got to think of the unintended consequences of taking a public that has more full faith and confidence in the banking system than maybe people in this room do

Consider they were talking about this stuff in late September, articles written just a few short weeks ago, the financial folks I follow have been saying to watch what the rich have been doing for a year.

Is SVB and FTX the canaries in the coal mine? Are they just blips?

I like how Ellen uses the 'soft landing' language in this piece. It has me thinking about an inflated balloon. If you take a pin ...it pops. If you place a piece of tape on the balloon and then try and pin pop the balloon it deflates slowly. Either way, all the air leaves the balloon.

[EBH]

Near the end of her article she notes that the secured creditors get paid first.

Lowly unsecured deposits will be last. That’s us with a simple savings account or checking account. In major crash we will be the one SOL.

[EBH]

At this point we, the citizen, has little control of the events unfolding before us.

[C210N]

FDIC capitalization was $2 billion on 12/31/20. It is designed for a bank here, a bank there.

Systemic failures, FDIC is useless.

That is where we are headed.

Think of the bright side - not a single plug nickel will be “paid back” of the $31.6 Trillion in National Debt. No a thin dime.

[DannyTN]

It's not like the government doesn't have a lot of options. But they do need to restore confidence quickly or they could have bank runs on a lot of smaller and regional banks. And I understand SVB was not a small bank. SVB didn't have a diversified client base like most big banks but they ranked #16 in terms of assets. Things the FED could do include:

• Pausing interest rate hikes to allow Banks time to adjust their asset portfolios.
• Lower the capital requirements for banks from the new 11% back down to 8% or even lower. It can be temporary, again to allow banks time to adjust.
• They could buy up all the long term government issued debt that is underwater due to the rate hikes at book value. The FED would have to recognize a loss when they did that. The same paper loss that the banks were facing due to the rate hikes. But if the FED then holds that debt to maturity they would recognize a gain equal to the initial loss, plus the interest that the asset yielded. The Fed would be whole. And banks would be whole with a ton of liquidity. Banks would then be free to reinvest their funds in shorter term assets and at higher rates.
• Steven Van Metre suggested the Fed lower the overnight repurchase rate to zero or at least below what banks are offering so as to not be competing against the banks for deposits. This would theoretically cause deposits to flow back into banks, as banks would again be paying the highest interest rates on short term deposits.
• They could boost FDIC insurance to $500,000 on all small and regional banks. If they stop the runs, they wouldn't have to pay anything out. And again, when they take over a bank like SVB, the Fed gets assets. It's just a problem to unwind them.

[C210N]

Nevertheless, there are things one can do.

Be prepared and be informed.

Trade worthless fiat (2% of what it was worth at the beginning of the FED in 1913) for money. That means physical silver and/or gold.

[LibWhacker]

So what’s the little guy to do, T-bills, hide it in the mattress, bury it in the back yard?

[maddog55]

Thankfully I keep all my bank accounts under $250k....

[C210N]

[C210N]

you might be a LOT better off with bank accounts under $2.5 k

[C210N]

So what’s the little guy to do, T-bills, hide it in the mattress, bury it in the back yard?

Your last option IMHO is the best, but what to bury? PMs. Physical PMs.

[Robert DeLong]

That’s why everyone should be arming themselves, and learning how to effectively use the tool. It’s about to turn very ugly, and sadly, I don’t think many people even see it coming.

[C210N]

I don’t think many people even see it coming.

Well depicted here...

There is a Storm coming, nothing like you've ever seen before

[meyer]

The FDIC printing press will be working overtime to bail out depositors and the over-leveraged banks.

[EBH]

Read carefully the article: If just one or a few banks become insolvent, the FDIC fund should be sufficient to cover the insured deposits (those under $250K). But under the 2005 Bankruptcy Act, derivatives creditors (which are considered “secured”) are first in line to recover the assets of a bankrupt bank; and the Dodd-Frank Act followed that practice. So if a bank with major derivatives risk collapses, there might be no bank assets left for the non-insured creditors;

That's you and I. WE are the unsecured if/when the FDIC insurance fails. WE would get nothing, by law. They are trying to hide and not hide this from the average Joe Public. Notice they talk about Joe Public having more faith in the system than they do!

You need to determine where your bank is invested and if you are at risk. Not all banks are at risk.