Pages

Sunday, March 19, 2023

The Banking System - Some Things to Know

Readers here know that this blog has followed events related to our monetary system for many years in an effort to monitor any events that might lead to some kind of disruption to the present monetary system whether that be major reform or a completely new monetary system. 

Extensive effort has been made here to provide the best quality information on this topic we can find. On the right side of the blog are links to many various systemic risks that have been identified over the years. Another link leads you to several different proposals or ideas on how to reform or remake the present monetary system. These come from some of the best experts (in my opinion) in the world on this topic. So all that archived information remains available and free to access for anyone who wants to use it.

Now we have a new set of issues arising with banks around the world and including in the US. By now, everyone knows a couple of large US banks failed and the FDIC and Federal Reserve have intervened in an effort to maintain public trust in the banking system. So, it is natural to ask the question -- Is this problem going to worsen and become a systemic risk to the entire monetary system?

We cannot answer that question here. We have advised readers that systemic risks like this are present all the time and at any time one or more of the risks could result in a failure of the present system. This most recent situation simply serves to remind us of that fact. It's too early to tell if this event will worsen and trigger a major crisis leading to major problems with the present system. Our advice here is to monitor events closely and if possible review your own banking situation to see if or how you could be impacted.

The best thing we can do here is to just try to provide some reliable basic information in an effort to help readers assess things. With that in mind, below is a bullet point list of information with that goal in mind.

-Some banks are experiencing problems with liquidity (having enough ready cash to meet funding requirements such as depositor payments and withdrawals). 

-Some banks are struggling because the rapid rise in interest rates has caused some of their investments in things that have an inverse relationship with interest rates to drop in current market value. For example, government bonds drop in value when interest rates rise. So long as the bank does not need to liquidate the bonds to meet cash demand requirements from depositors, they don't have to sell the bonds and take a loss.

-If for any reason cash demand requirements from depositors exceeds available ready liquid cash, then banks have a problem. They could be forced to sell their long term investments at a loss to raise the needed cash.

-The Federal Reserve, recognizing this problem, created a program to allow banks needing cash to sell their bonds to the Fed for full market value even though their current market value has dropped below what they paid for the bonds (because interest rates have risen).

-The FDIC insures each individual bank deposit account up to $250,000, however they do not insure any amount over $250,000 unless the bank involved is deemed to be a "systemic risk" if it fails. This means many smaller regional banks do not currently have protection above the $250,000 amount since they would not be viewed as "systemic risks" to the entire banking system. Congress is discussing this situation right now per this article on CNBC.

Given the facts above, obviously anyone who has a bank account needs to understand the above information and review their bank to assess what level of risk it may have at this time. One tool I did find that may be helpful is found on this link for iBanknet. This web page allows you to search individual banks where you can find a link to their Balance Sheet information.  You may have to enter a code to prove you are not a computer bot first. 

Once you find your bank and go to the link showing the Balance Sheet information, you can then review the assets and liabilities the bank has. It will give an idea of what kind of risks that particular bank may or may not have at this time. The data is pretty current on the banks I looked at.

A couple of other information resources you may find of value or interesting to read are linked below.

If we find credible information regarding the impact of this situation on the overall banking system and/or the monetary system, we'll post it here. (note: Central Banks take global liquidity action)

Recent Update/Discussion on the Banking Issues from Jim Rickards

Alisdair Macleod - Banking Chaos

Dr. Warren Coats (former IMF) - Econ 101 and Bank Runs

Jim Rickards - The Fed Finally Broke Something

Conclusion: It's impossible for anyone to really predict how this situation will play out. Our entire system is fully based on public trust and confidence both in the monetary institutions they rely on and also the currencies issued by various governments. So long as the public maintains trust in that, it is easier to operate a more stable system. If public trust is eroded too much, it becomes much harder to operate a stable system. Each person has to assess for themselves what level of public trust exists at any given point in time. No one can 100% sure what human behavior/reaction will be when problems arise in any system.