Posted on 08/30/2024 7:14:14 AM PDT by delta7
A new study by Florida Atlantic University believes that 94 separate US banks are facing a significant risk of bank runs. The at risk banks have all reported a 50% or higher ratio of uninsured deposits to total deposits. Basically, they simply do not have the hard currency to shell out in the event of a panic.
Banks currently limit cash withdrawals under the pretense of money laundering and security. They will ask all sorts of questions if you even TRY to withdraw your money. They realize we are on the verge of a crisis in banking on a global scale.
The University’s Liquidity Risk from Exposures to Uninsured Deposits index found that BNY Mellon and John Deere Financial have a 100% ratio of uninsured deposits, followed by State Street Bank (92.6%), Northern Trust (73.9%), Citibank (72.5%), HSBC Bank (69.8%), JP Morgan Chase (51.7%), and U.S. Bank (50.4%).
The Federal Deposit Insurance Corporation (FDIC) has the power to shutdown a bank before a bank run occurs. The FDIC is controlled by Congress and acts as a safety measure to protect insured deposits in the event of bank runs. Deposits over $250,000 are not insured nor are mutual funds, annuities, life insurance, bonds, or stocks. Uninsured depositors have experienced a mere 6% in losses over the past 16 years.
Let’s take a look at the Silicon Valley Bank (SVB) failure of March 2023. The FDIC agreed to make all account holders whole including those with uninsured deposits. SVB has an uninsured deposit ratio of 97% at the time and failing to cover all losses would have created a panic in the banking world. The FDIC invoked the “Systemic Risk Exception” for SVB and Signature Bank that enabled them to protect uninsured depositors when deemed necessary. Two-thirds of the FDIC board voted in favor of the measure and the Fed, Treasury Secretary, and president signed it off.
The FDIC relies on the Deposit Insurance Fund (DIF), which is backed by Washington. Now, what happens when multiple large banks fail? It was easy for the government to write off a few banks to brush the severity of the situation under the rug. If everyone tried to withdraw their accounts at the same time, the government would not have the hard currency to back it. This is one of the major reasons that we will see a conversion from hard currency to digital.
I have stressed that studies in ancient times as well as modern show that during a crisis you head toward DEFLATION as money becomes scarce, the VELOCITY of money collapses, and people HOARD wealth – they do not spend it. The US will experience a period of stagflation as GDP will decline as inflation soars. Banks will begin to fail in Europe before it becomes a global contagion.
94 US Banks Burdened by Uninsured Deposits – Risk of Bank RunsNot to worry.
“What We See Can Be Unburdened By What Has Been” Marx/Harris
Fair point, but complaining about currency devaluation is like complaining about the weather. You have absolutely no control over it, so your energy is best spent dealing with it within your own limitations.
I’m not sure how this is hard to understand.
People deposit money and they take money out. That’s the banks sole job. They have to ensure that people have money to do their business.
But banks have found, in doing business, that they don’t need 100% of deposits sitting in a vault, in case customers need. They have found that, normal day to day transactions, they only need a fraction of the money.
If a bank can’t pay out, because they have a surge in customers wanting their money, they have to close until they have refilled their vaults to continue to do business. They will either borrow from the Feds or another bank to do that. However, when that is no longer an option, they close.
I’m only pointing out that one of the reasons for bank runs is because the banks have chosen to leave less in the vault than what they are able to cover because of a surge of customers wanting their money.
Lovely explanation. That’s basically it.
All animals are equal, however some are more equal than others.
Indeed who says incompetence reaches the top when nobody is looking.
Fractional Reserve Banking: What It Is and How It Works
How much reserve is a bank lending institution required to have on hand?
What Is Fractional Reserve Banking?
Fractional reserve banking is a system in which only a fraction of bank deposits are required to be available for withdrawal. Banks only need to keep a specific amount of cash on hand and can create loans from the money you deposit. Fractional reserves work to expand the economy by freeing capital for lending. Today, most economies’ financial systems use fractional reserve banking.
On March 26, 2020, the Federal Reserve reduced reserve requirements for all depositary institutions to zero. Instead, banks are now paid a specific interest rate on their reserve balance to encourage holding reserves.
https://www.investopedia.com/terms/f/fractionalreservebanking.asp
People deposit money and they take money out. That’s the banks sole job. They have to ensure that people have money to do their business.
That might have been the case to the folks on "Little House on the Prairie," but banking is FAR more than this. Banks are also in the business of lending, not just storing money in a vault. Banks would charge a fee instead of paying interest if their sole job was to hold deposits.
But for the sake of this discussion, let's leave aside the lending side of the business.
In order to pay interest to depositors, a bank has to take those deposited funds and do something with them. What exactly is a bank supposed to do with your money in order to pay you a 2% to 5% return on your savings accounts and certificates of deposit? They do two things: (1) they lend money at higher interest rates than they pay you; and (2) they invest in stable, "safe" investment vehicles such as government bonds.
It's no more complicated than that. And keep in mind that your "bank run" involving thousands of people running to the local branch to withdraw their $5,000 cash is not even an issue for the bank. The bigger problem is the corporate customer that keeps an average of $10 million in the bank and needs $500,000 every two weeks to meet its regular payroll. All of the CURRENT problems you are reading about in the banking industry are all tied to the complexities of managing the cash flows of these deposit-withdrawal cycles while generating enough revenue to pay the bank's costs of doing business.
I’m only pointing out that one of the reasons for bank runs is because the banks have chosen to leave less in the vault than what they are able to cover because of a surge of customers wanting their money.
You've just described the basic business model for fractional reserve banking, which has been the standard practice in banking for as long as either of us have been alive.
I’m not claiming to be clever. But that’s the overall picture. Many banks have placed themselves at risk, because they’ve reduced what they hold to well below previous levels that were considered safe.
To survive, they have to have enough on hand to conduct business for people making withdrawals. I’m not denying lending or investing, but people also take money out.
Fractional reserve banking has been a practice, yes. The Rothschilds invented it. You still need a certain amount in the bank to cover withdrawals. It’s still a problem if too many people try to take out their lifesavings, as it’s already been noted.
Brings to mind the movie "It's a Wonderful Life" with Jimmy Stewart. His uncle Billy mishandles a large sum of money running the bank, and depositors demand their savings be withdrawn. Stewart explains to customers that their money is tied up in their neighbors' loans for remodeling, businesses etc., and could they accept only a portion of their accounts. Banks just don't have a lot of money laying around in their vault.
The Bank Run scene - It’s a Wonderful Life
That has as much to do with being robbed as it does with reserves.
We (The bank where I worked) had a Branch in our town get robbed for more than $100k one Friday afternoon. Shortly thereafter, they cut back on the amount of cash in any branch. You could still get your big cash withdrawals…but you would have to go to the main branch or wait a day to have it delivered.
99.9% of people understand that.
Some people think they should have $20 million in each branch vault. That is not going to happen.
It’s funny…in the BIG vault, I have seen stacks of cash that more than cover every request for cash for a few weeks.
I don't know if that's true at all. I'd be curious to see if you have any information to support that statement.
Banks are among the most heavily regulated companies in the world. The reserve requirements for a bank are established by the FDIC and/or Federal Reserve, not just pulled out of thin air haphazardly.
Interestingly, banking is one of the only industries in the U.S. today where the laws and regulations are set up so that the business establishment (the bank) is actually screwed on behalf of the customer (you and me).
Withdrawals do not trigger SARs. Only deposits that are greater than $10k or “suspicious in nature.” The definition of “suspicious” is pretty much whatever the teller thinks it is. So, if you bring in $2k in cash, smeared with blood….someone is going to get a call.
Probably the same people who think electricity comes from the wall socket.
A lesson I learned the hard way. :-(
LOL.
Quote:
Probably the same people who think electricity comes from the wall socket.
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Or that a money laundering operation involves Maytag or Whirlpool.
People’s understanding of how banks work is kind of scary.
Nor do they understand the differences between the types of banks. There are Community Banks, Mutual Banks, Credit Unions, Commercial Banks, Retail Banks, and Investment Banks. Then you toss in the Financial Center and Insurance banks. There are Federally chartered banks and state chartered banks.
Comparing SVB to the community bank on the corner is comparing the corner diner to A Michelin Star Rated Restaurant. They both provide a service, but for different clientele in different ways. Neither is better than the other.
1. Start-up Company ABC deposits $100 million in Bank XYZ over the course of several years from 2015-2020. Most of this money is investment capital from the founding partners.
2. Bank XYZ pays out 2% to Company ABC on these deposits during the low-interest environment of that time.
3. The bank takes the $100 million and uses it for both lending activity and reserves. $50 million is used to make loans that pay 5% to the bank. $50 million is invested in long-term U.S. Treasury bills paying 3%. The "spread" between the bank's investments (5% on the loans and 3% on the government bonds) is how the bank pays its bills and makes money.
4. In 2023, Company ABC comes to the bank and says: "We need $20 million to fund a merger/acquisition."
5. Bank XYZ doesn't have $20 million in cash lying around because it has committed the $100 million elsewhere. So it basically has two options: (A) borrow money from another bank through a 30-day, 90-day, or six-month "interbank" loan; or (B) sell off some of its U.S. Treasury bills to raise the $20 million.
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Note that everything I've presented here is exactly how the banking industry has worked for decades. There's nothing unusual about any of this. You'll also note that one option the bank does NOT have is to tap the $50 million it has used to make the loans paying 5%. If you have a 30-year mortgage on your house, the bank can't make you pay it off immediately just because the bank needs the money to meet its obligations to its depositors.
This process fell apart in the last 2-3 years for two basic reasons that relate to the process I described above (and not that neither reason has anything to do with defaults on the bank's $50 million in loans, "risky investments," or anything of that sort) ...
A. Interest rates rose so rapidly from 2021-2024 that when Bank XYZ goes out looking to secure its short-term interbank loan, the rate they have to pay on that loan is 7% or 8% -- which is higher than what the bank is getting on its 5% loans and its 3% Treasury bills. The bank has to run at a loss just to finance manage its cash flow this way.
B. With interest rates rising, existing U.S. Treasury bills paying 3% to their holders lose a lot of value. Who wants to buy an existing U.S. Treasury bill paying 3% when the U.S. Treasury is issuing new debt paying 5%? So the bank's $50 million in Treasury bills aren't worth $50 million right now, and the bank may have to sell about $30 million of those bonds to generate enough cash to fulfill the $20 million of Company ABC's deposits. The bank loses $10 million in its bond portfolio just to make good on a $20 million deposit obligation.
*** Now imagine this happens 100 more times with other corporate customers. ***
This -- and not insufficient bank reserves -- is what has been driving the turmoil in the banking industry since 2022.
The first five steps is how I understand it as well.
When the bank doesn’t have the money off-hand, it will either call in its other branches to keep it afloat by using their reserves or they will contact the local federal reserve to loan them enough to get out of, but that usually takes at least a day.
You get enough small loans doing this, and it’s like a large loan doing it. It’s just that the banks have made a science on how the money flows amongst the small people. They know the approximate rate that money flows in and out from small accounts, so they base what they carry based on how people operate.
I understand your point about large loans, but it operates the same way if a wave of hysteria hits.
It still comes down to a common cause, not keeping enough in their reserves to pay out whomever might want their money back.
It used to be they kept 1 dollar for every nine they had in accounts, but it is now to zero.
https://www.investopedia.com/terms/b/bank-reserve.asp
I presume it’s zero because the federal reserve will print and loan whatever is needed at a moment’s notice.
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