What is Risky In Life - Zero Reserve or Full Reserve Banking?

Welcome to the Precious Metals Bug Forums

Welcome to the PMBug forums - a watering hole for folks interested in gold, silver, precious metals, sound money, investing, market and economic news, central bank monetary policies, politics and more. You can visit the forum page to see the list of forum nodes (categories/rooms) for topics.

Why not register an account and join the discussions? When you register an account and log in, you may enjoy additional benefits including no Google ads, market data/charts, access to trade/barter with the community and much more. Registering an account is free - you have nothing to lose!

Since the inception of the Federal Reserve System, our fractional reserve banking system has steadily degraded reserve ratio requirements until they finally just did away with them altogether and ushered in our brave new era of zero reserve banking. Banks are not tasked with maintaining any specific thresholds of reserves and now manage liquidity by buying and selling debt instruments as necessary.

It works great - until it doesn't. As the Federal Reserve embarked on QE and lowered interest rates towards zero several years ago, banks loaded up their balance sheets with low interest bearing debt. When the Fed reversed course with QT and raising rates to combat inflation, many banks were caught with balance sheets full of upside down investments. Unable to keep pace with the yields offered by Money Market Funds (MMFs), they are facing deposit redemptions as money is pulled from the banks to chase yields in MMFs. The situation is leading to fears of a systemic crisis as half of America's banks are reportedly already insolvent.

bankfailures.jpg


The Fed Knows Best? They Certainly Know Irony​


Consider the saga of Custodia Bank:
...
So a few years ago, Wyoming, the state, created a blockchain task force to figure out how to modernize their state law to be more friendly to financial technology, bitcoin, and blockchain technology. And one of the measures that the legislature passed was a law creating special purpose depository institutions. They say, "Look, what we're going to allow with…" they call it the SPDI Charter, and perhaps it's inaptly named because they're not getting started really speedily. "But what we hope to do with this SPDI charter is let banks get a charter that allows them custody cryptocurrency, provide US dollar payments to be an on-ramp and an off-ramp to cryptocurrency, but would not let them lend. Instead, all of their deposits would have to be stored in safe, relatively liquid assets." And so Custodia applies for this SPDI charter, they get it. They want to custody cryptocurrency for institutional investors, family offices.
...

Custodia Bank applied for both membership in the Federal Reserve System and for a Fed Master Account. Custodia Bank planned to use a full reserve banking model to satisfy risk requirements of Wyoming where it got it's charter, except it planned to serve the crypto industry. So, with America's War on Crypto (and Operation Choke Point 2.0) in full swing, the Fed denied Custodia's applications with the justification that:
... Custodia had insufficient risk management and controls, “particularly with respect to overall risk management; compliance with the Bank Secrecy Act and U.S. sanctions … financial projections, and liquidity risk management practices.”

The board also argued that Custodia’s revenue model, which “relies almost solely upon the existence of an active and vibrant market for crypto assets” makes it vulnerable to market volatility, even though the board admitted that “Custodia appears to have sufficient capital and resources to sustain initial operations.”

Great job fellas! You certainly understand risk management controls and liquidity risk management practices and know a solid bank when you see one. The last decade is replete with examples (see graph above).

Narrow Thinking​


Now consider the saga of the Narrow Bank:
... the Narrow Bank is a Connecticut chartered bank, and they want to accept deposits, big deposits from institutional investors and just hold them in a Federal Reserve account. These big institutional investors have deposits that are so large that they can't be covered by deposit insurance, which caps out at $250,000. And so when these businesses take money and put it at a bank, they're subject to some risk, the credit risk, the liquidity risk of the underlying bank. And TNB, The Narrow Bank says that they can make a safer place for these institutional investors because instead of lending out the money, subjecting the depositor to credit and liquidity risk, they're just going to take the money and put it in an account at the Fed. And TNB thinks that it could make money because the Federal Reserve pays interest on excess reserves. And so they could earn the money from the Federal Reserve, pass a little bit of it on to their own depositors and pocket the difference, making for profitable business model.

So they got a charter from Connecticut, life seemed to be good, and they asked the Federal Reserve Bank of New York for a master account and then nothing happened. They hear that the board’s become concerned about their business model, that it might impact the Fed's ability to conduct monetary policy. One of the things that they're very worried about is that during times of economic uncertainty, everyone would decide TNB is safer, and so they'd withdraw their money from traditional banks and put it in TNB. And they say that that would be problematic. Another thing that they're worried about is that because TNB wouldn't be constrained by the same sorts of capital rules, that it would just grow bigger and bigger and bigger. And that might make it hard for the Fed to have the same impact in their efforts to control the money supply.

So TNB gets sick of waiting after 18 months or so, and they sue. And the Fed's argument in the suit is, look, we haven't made a decision yet. And the court considers it and says, well, it's right. The Federal Reserve hasn't made a decision, so it's not right for us to consider it. Part of the court's decision there too was, I think, this possibility that the Fed might be able to deny the account on some technical ground. The court thought maybe that the Connecticut charter had expired. It hadn't, Connecticut had given them another 18 months to get the bank off the ground, and Connecticut has extended it a number of times since then. But the Narrow Bank has been waiting now for more than five years for the Fed to decide whether or not they can open an account.
...

The issue that led to the current wave of regional bank failures was deposit draw downs and then, in SVB's case, a run on deposits from customers holding large, uninsured deposits - the very customers that the Narrow Bank sought (seeks) to service.

Great job fellas! Another triumph of risk management for masses.
 
Last edited:
:cheers: Mr. Kaloudis

... People should have the option to deposit with these narrow banks that don’t participate in fractional reserve banking practices because, as we’ve seen recently, when fractional reserve banking goes wrong the fallout is catastrophic.
...

 
Ok I'm going to start out with a basic question. Is it not true that people are pulling their money out of these regional banks not because of fear but because you can get 4 percent at a Goldman Sachs account and no way any of these regional banks can compete with that, in fact not even close because of their bond and mortgage rate loan exposure?
 
Ok I'm going to start out with a basic question. Is it not true that people are pulling their money out of these regional banks not because of fear but because you can get 4 percent at a Goldman Sachs account and no way any of these regional banks can compete with that, in fact not even close because of their bond and mortgage rate loan exposure?
Yes, Money Market Funds are seeing inflows as bank deposits are shrinking. Deposit flight is causing the banks stress because they don't have sufficient reserves and are having to take losses to raise cash.

That said, the banking problems that started with Silvergate (the first bank to fail) had to do with crypto firms that drew down deposits because of market/business requirements. Had Custodia bank been granted it's membership and master account, it's possible that none of the regional banks would have failed.
 
That said, the banking problems that started with Silvergate (the first bank to fail) had to do with crypto firms that drew down deposits because of market/business requirements. Had Custodia bank been granted it's membership and master account, it's possible that none of the regional banks would have failed.
Yes agree!
 
... A 100 percent safekeeping bank, one that did not make any loans but only parked money at the Fed, in T-Bills, or in time-matched treasuries as suggested, would have no discernable risk. ...


I guess Mish isn't aware that the Fed has explicitly rejected this idea several times already...
 
Banking crisis out of sight and out of mind:
Did anyone else notice the Chairman of the Federal Reserve casually admit recently that our central bank has no long-term strategy for handling the banking crisis? Jerome Powell was asked recently ... what would happen in March of 2024 when loans begin coming due from the Bank Term Funding Program (BTFP). He literally said that they hadn’t thought that far ahead.

Powell & Co. created a $100+ billion bailout facility with no exit strategy, and now they talk about it like it’s nothing. The attitude extends even to major banking houses like Bank of America, which has openly admitted that it has hundreds of billions of dollars of unrealized losses on its books but expects to realize none of them. In other words, everyone, the Fed included, is acting like the BTFP is a permanent facility.
...
... The BTFP is loaded with long-term securities that will likely pay below-market rates for 2 to 30 years.

This has created a rachet effect with the new facility, where banks dumps securities on the Fed but can never really pay off the loans before the collateralized assets mature. That has pushed the BTFP to $114 billion, and it’s poised to continue creeping higher each time banks need cash and can’t liquidate the rest of their depreciated assets, except at a loss.
...

More:


...
Total outstanding loans in the Federal Reserve’s bank bailout program jumped by just over $5 billion in November.

There was a sudden spike in banks tapping into the bailout program during the first week of the month with financial institutions borrowing $3.87 billion from the Bank Term Funding Program (BTFP). There was another surge in borrowing between Nov. 15 and Nov. 22, according to Fed data.

As of Nov. 22, there was $114.1 billion in outstanding loans in the BTFP bank bailout program.
...

 
A trio of regional banks faces increasing pressure on returns and profitability that makes them potential targets for acquisition by a larger rival, according to KBW analysts.

Banks with between $80 billion and $120 billion in assets are in a tough spot, says Christopher McGratty of KBW. That's because this group has the lowest structural returns among banks with at least $10 billion in assets, putting them in the position of needing to grow larger to help pay for coming regulations — or struggling for years.

Of eight banks in that zone, Comerica, Zions and First Horizon might ultimately be acquired by more profitable competitors, McGratty said in a Nov. 19 research note.
...
Banking regulators have proposed a sweeping set of changes after higher interest rates and deposit runs triggered the collapse of three midsized banks this year. The moves broadly take measures that applied to the biggest global banks down to the level of institutions with at least $100 billion in assets, increasing their compliance and funding costs.


The system has imposed regulatory barriers to growth on the small banks (in an attempt to prevent the whole system from toppling like dominos). You better have good red tape kung fu if you want to play in the big boy pool.
 
TrustTexas Bank got slapped by the FDIC on October 30:
The Federal Deposit Insurance Corporation ("FDIC") is the appropriate Federal banking agency for TRUSTTEXAS BANK, SSB, CUERO, TEXAS ("Bank"), under 12 U.S.C. § 1813(q). The Department of Savings and Mortgage Lending ("SML" or "Department") is the appropriate state banking agency for the Bank, under Texas Finance Code, Title 3, Subtitle C, §§ 91.001 et seq.

The Bank, by and through its duly elected and acting board of directors ("Board"), has executed a "STIPULATION TO THE ISSUANCE OF A CONSENT ORDER" ("STIPULATION"), dated October 26, 2023, that is accepted by the FDIC and the Department. With the STIPULATION, the Bank, without admitting or denying any charges of unsafe or unsound banking practices relating to interest rate risk exposure, deterioration in capital protection and earnings, and deficiencies in management and oversight by the Board, has consented to the issuance of this CONSENT ORDER ("ORDER") ...

(.PDF):

 
FDIC report shows bank stress still running high. Not looking good for a resolution on the BTFP program:
...
Unrealized Losses on Securities Increased From the Prior Quarter: Unrealized losses on securities totaled $683.9 billion in the third quarter, up $125.5 billion (22.5 percent) from the prior quarter. Unrealized losses on held-to-maturity securities totaled $390.5 billion in the third quarter, while unrealized losses on available-for-sale securities totaled $293.5 billion.
...
Total Deposits Declined for a Sixth Consecutive Quarter: Total deposits declined by $90.4 billion (0.5 percent) between second and third quarter 2023. This was the sixth consecutive quarter that the industry reported a lower level of total deposits.
...

 
...
In a breakdown for the week to Dec. 6 ...
...
... usage of The Fed's Bank Term Funding Program (expensive bank bailout fund) exploded higher by $7.8BN (biggest increase since April) to $122BN (a new record high)...

For banks tapping the Fed's BTFP, there’s an arbitrage to be deployed where institutions borrow from the facility and park the proceeds in their account at the central bank, according to Bill Nelson, chief economist at the Bank Policy Institute in Washington and a former Federal Reserve economist.
The interest rate on BTFP loans was about 5.18% as of Dec. 1 — one-year OIS swap rate +10bp, while interest on reserve balances is 5.40%

BTFP loans have a term of one-year and the rate is fixed for the term of the loan and can be repaid without penalty, and only backed by securities the bank owned as of March 12

“So borrow from the BTFP, leave the proceeds on deposit at the Fed, and collect the 22bp spread,” Nelson wrote.

If the BTFP rate falls further, banks can repay the loan early and take out a new loan. If IORB falls below the rate on the BTFP loan, institutions can repay the loan

“A similar arbitrage opened up for AMLF loans in May 2009 and the Fed quickly adjusted the program to close it,” he said
...


So it's possible that the increase in the use of the BTFP is not indicative of stress but banks wanting free money from the Fed. We won't really know until the (if) the BTFP program ends I guess.
 
A longtime bitcoin custodian has evolved over the years into becoming much like a sort of financial institution that's been denied to U.S. citizens: a narrow bank.

Why it matters: Xapo doesn't describe itself as such, but it offers a glimpse of the type of services that entrepreneurs have been pushing in the U.S. for years — banks designed to be nearly riskless.
...
The intrigue: Various players have wanted to launch narrow banks, but U.S. regulators have yet to permit one (even when a Fed alum tried to open one).

https://www.msn.com/en-us/money/other/a-bitcoiners-narrow-bank-everywhere-but-here/ar-AA1l6H8e
 
The Basel Committee on Banking Supervision today published a consultative document to propose targeted adjustments to its standard on banks' exposures to cryptoassets.

When the cryptoasset standard was published in December 2022, the Committee noted that certain issues would be subject to monitoring and review due to the rapid pace of market developments. Following reviews conducted during 2023, the Committee proposes to update the requirements relating to banks' exposures to stablecoins.

The proposals flesh out the criteria on the composition of the reserve assets that back stablecoins, covering issues such as the credit quality, maturity and liquidity of the reserve assets. The requirements determine whether the stablecoins to which banks' may be exposed will be eligible for inclusion in the Group 1b category of cryptoassets, and thus benefit from a preferential regulatory treatment.
...


Here's an idea... how about letting stablecoins use narrow banking and eliminate these risks altogether.

The BIS is accepting comments on this issue, so I submitted the following:
Here's an idea. How about recommending central banks to allow stablecoin issuers to use narrow banking like Custodia Bank tried to do:

https://www.pmbug.com/threads/what-is-risky-in-life-zero-reserve-or-full-reserve-banking.5723/

and eliminate systemic risk completely?

I wonder if they will publish it?
 
Last edited:
A central banker admits a hard truth (referring to stablecoins):
Bank of Korea Governor Rhee Chang-yong said:
Their widespread adoption could diminish the role of central bank money and impair the effectiveness of monetary policies.


There will be no free market competition in currencies. The global monetary system is all about control.
 
...
I guess Mish isn't aware that the Fed has explicitly rejected this idea several times already...

Mish is banging the drum again and in this post, he does mention that the Fed has rejected previous attempts:

 
The reference links in this article do not work for me, which is unfortunate because I am interested to know what he is referring to with the BoE comment in point #8.

Marcel Kasumovich - Deputy CIO - Coinbase Asset Management said:
...
8. Fate loves irony, especially in finance. Stablecoin is recognized by its users as the premier narrow bank. A fully reserved stablecoin has virtually no risk of a bank run. And if those reserves are in the form of deposits at the central bank, as now contemplated by the Bank of England yet rejected by the US Federal Reserve, the risk is literally zero. Traditional banks can’t compete – a run leads to a sudden stop of access to deposits and especially foreign currency.

9. But what if the stablecoin or the US dollar were the source of instability? This is exactly where free markets shine, adjusting without intervention.

10. Imagine a confidence crisis in an individual stablecoin. Stablecoin can exchange hands many times in a single day. Its high velocity makes the move to an alternative swift – good collateral migrates to stablecoin where investors are confident. We lived this in 2022. And if the collateral were insufficient to guarantee a 1:1 value, those holding the “bad bank” coin bear the loss. Not surprisingly, proof of reserves is in high demand to guard against this threat.

11. Next, imagine a confidence crisis in the US dollar more broadly. More complicated, you say? Yes and no. The same principles of collateral migration apply – only the collateral changes. In the case of a currency crisis, users are swapping US dollars for hard assets. It’s still a migration from one stablecoin to another, only the other is likely to be an asset like gold to negate the risk of inflation or devaluation. This “flatcoin” would be a move away from fiat currencies.

12. It would be the ultimate irony – a gold standard returns through the backdoor of crypto markets. It’s not a matter of likely or not. It’s a possibility. And creative minds are building in this direction. Like Quorium and its stablecoin backed by gold reserves that stay in the ground. In essence, the owner has a claim on proven reserves, with Quorium transforming an in-ground gold asset into a high-velocity store of value.
...

 
BIS paper authored by four people including someone from the San Fran Fed:
...
The aim of this paper is to assess empirically how financial stress responds to a monetary tightening and whether the response varies if inflationary pressures are demand– or supply–driven. ...

Our findings are twofold

First, policy rate hikes increase financial stress in the short and medium term in the presence of supply–driven inflation —that is of adverse supply or cost–push shocks. Furthermore, the estimated reaction increases in the level of supply–driven inflation, and hence of underlying adverse supply pressures. This finding points to a particular tension between price stability and financial stability when inflation is high and largely supply–driven. There are several explanations for this finding. When central banks raise rates in response to supply–driven inflation, the economy is typically also experiencing negative pressures on output. Adverse supply shocks (e.g. supply chain disruptions, high energy prices) not only spur inflation but also weigh on borrowers’ cash flows, undermining their usual role as “natural buffers”. By contracting aggregate demand, a policy rate hike further reduces borrowers’ cash flows and leads to a rise in credit default risk. Financial frictions make borrowers excessively sensitive to rate hikes. When credit markets are subject to frictions (e.g. moral hazard, asymmetric information, costly state verification), higher default risk induces lenders to require additional guarantees in the form of yet higher credit spreads and external finance premia, thereby further increasing borrowers’ default risk — the so–called “financial accelerator” (Bernanke, Gertler, and Gilchrist (1999a), Bernanke and Gertler (1995), Gilchrist and Zakrajˇsek (2012), Gertler and Karadi (2015)). The excess sensitivity of borrowers’ financing conditions to policy rate hikes further leads to excess sensitivity of counter–party risk. Thus, at times, counter–party risk may become so elevated that financial markets freeze and the economy slips into a financial crisis as in Boissay, Collard, Gal´ı, and Manea (2023).


We find ourselves today in the midst of purportedly supply shock driven inflation (thanks C19, supply chain disruptions igniting monetary expansion). They know this induces default risk to the point of a systemic banking crisis. And yet, they refuse to consider narrow/full reserve banking for the masses.
 
The Federal Reserve Board on Tuesday announced the execution of the enforcement action listed below:

Marblehead Bancorp, Marblehead, Ohio, and Marblehead Bank, Marblehead, Ohio
Written Agreement dated December 14, 2023
...


Skimming through the actual agreement:


That bank seems to be getting slapped for their incompetent management team as well as FUBAR finances. Yikes.
 


Did you ever hear of the Independent Treasury Act of 1920?

The Independent Treasury Act of 1920 suspended the de jure (meaning "by right of legal establishment")Treasury Department of the United States government.

Our Congress turned the treasury department over to a private corporation, which when seen in its true light, is a fascist monopolistie cartel, the Federal Reserve and their agents.

The bulk of the ownership of the Federal Reserve System, a very well kept secret from the American Citizen, is held by these banking interests, and NONE is held by the United States Treasury:
  • Rothschild Bank of London
  • Rothschild Bank of Berlin
  • Warburg Bank of Hamburg
  • Warburg Bank of Amsterdam
  • Lazard Brothers of Paris
  • Israel Moses Seif Banks of Italy
  • Chase Manhattan Bank of New York
  • Goldman, Sachs of New York
  • Lehman Brothers of New York
  • Kuhn Locb Bank of New York
The Federal Reserve is at the root of most of our present statutory regulations, "laws", in the control and regulation of virtually all aspects of human activity in the United States, through successively socialistic constructions laid upon the Commerce clause of the Constitution.

Basically, the Federal Reserve is the "STATE" of the United States.

Thomas Jefferson once said:

"I believe that banking institutions are more dangerous to our liberties than standing armies".​

The Gold Standard is how we undo all of this corruption.
 
...
While the prospect of less restrictive monetary policy was welcomed by banks and financial market participants broadly, some analysts say the rosier outlook makes it less likely that the Bank Term Fund Program, or BTFP — which was set up in response to the bank failures of this past spring — will be renewed next March.
...
Authorization for the program ends on March 11, 2024, so banks have up until that date to pledge collateral, giving banks the option of recapitalizing their holdings into 2025.

By law, authorizing — or in this case, re-authorizing — an emergency lending facility requires "unusual and exigent" circumstances. While there is no set criteria for what constitutes unusual and exigent, Tang noted the conditions need not be as dire as they were in the spring.
...
Use of the BTFP has risen throughout the year. Borrowing from the facility hit $79 billion by April 5 and has grown steadily since then, reaching $124 billion on Dec. 13. While this volume makes up a small percentage of overall bank funding, Karen Petrou, managing partner at Federal Financial Analytics, said removing the facility could have consequences.

"As with all its emergency fixes, the Fed is in a mighty pickle if it closes the BTFP," Petrou said. "Banks continue to sit on large unrealized losses and love this security blanket."
...

 
What is really happening with the BTFP right now?

...
The Bank Term Funding Program allows banks to borrow for up to one year by pledging collateral at par even when they’re trading at a loss, and it has seen week-over-week gains since the autumn. What’s more, the pick-up in the facility coincides with a few recent spikes in the Secured Overnight Financing Rate.

“So, there’s definitely some evidence that banks are getting short on cash, and they’re having to pay more to get it,” says Moses Sternstein, who wrote about the phenomenon in his Random Walk blog.
...
There could be a seasonal impact as well. Ryan Plantz at Nomura, who commented on the spikes in the SOFR rate, noted signs of deteriorating liquidity and tighter funding into the year end.
...


...
While this is, at first glance, a worry - banks are borrowing more to fill their balance sheet loss holes - there is another possibility.

An arbitrage for banks is growing more attractive thanks to traders who are betting the Fed will aggressively cut interest rates in 2024.
...
For institutions that have an account at the Fed, they can borrow from the BTFP at 4.88% and park that at the central bank to earn 5.40% - the interest on reserve balances.
...


Is it evidence of stress in the banking sector or a stealth bailout to the banks?
 
ZH says small/regional banks are only able to function thanks to the Fed's help and if the BTFP ends in March as scheduled, they will be in trouble:


That aligns with Rickards' prediction:

 
Does this count as the first bank failure of 2024? Maybe not technically...

The order from the Federal Deposit Insurance Corp., which the agency made public last week, is similar to the sell-or-merge directives that regulators used after the 2008 financial crash to force troubled banks to take action, industry lawyers say.

But this time, the FDIC order is more akin to sell-merge-or-liquidate — effectively shutting down the bank if another institution can't get it out of its problems. The bank in question, Liberty Bank in Salt Lake City, is one of the smallest in the country, with just $13 million of assets.

The action was surprising to several bank lawyers and regulatory experts contacted for this story. They pointed to issues the FDIC laid out with the bank's bookkeeping, a requirement that the bank get the value of its premises appraised and even a directive to figure out who owns a parcel of land used for extra parking.

Most surprising was the public nature of the FDIC's repudiation, an escalation from what likely was behind-the-scenes pressure from agency officials, the experts said. A public rebuke raises the risk that depositors could pull their money, they said.

"It's unusual," said Bob Hartheimer, a senior advisor at the consulting firm Klaros Group who, in the early 1990s, oversaw the sale of some 200 failed banks as a top FDIC official in charge of resolutions. The bank and its board likely heard the same message privately "for multiple quarters, if not more," Hartheimer added.

The bank has not been consistently profitable since 2007, according to an American Banker review of regulatory data on its quarterly performances.
...

More:


~~~

BTFP update:
...
Usage of The Fed's BTFP bank bailout facility surged by over $5BN to a new record high of $141BN...

The BTFP-Fed Arb continues to offer 'free-money' (and usage of the BTFP has risen by $32BN since the arb existed), but the spread has narrowed a smidge from a peak near 60bps to 50bps today...

 

this one gets my attention......i am assume the unrealized losses are not general accross the board and are concentrated in certain bank types or sectors.....also i thought banks had to keep track of and acknowledge as part of their reporting non and under performing assets .... 33% unrealized losses in the context of 10% reserve is stark ....time for a bit of my own research in my banks....this is a
"emperor is not wearing any clothes" stat

Edit to add: might not be quite as bad as i first thought as its a % of equity
 
...also i thought banks had to keep track of and acknowledge as part of their reporting non and under performing assets ....

That's the rub. I'm short on time ATM, so can't look it up, but there was a change in the way they had to mark these assets recently. We're learning about them now. They weren't (required to be) reporting them before as I understand it.
 
That's the rub. I'm short on time ATM, so can't look it up, but there was a change in the way they had to mark these assets recently. We're learning about them now. They weren't (required to be) reporting them before as I understand it.
it might not be quite as bad as first thought....as its a % of bank equity ....but bears some research
 
...
Ambrose Evans-Pritchard is more dire, as in his wont, but he also provides much more substantial analysis than the pink paper did. His recent article, Fed rate cuts come too late to avert a fresh wave of US bank failures, relies heavily on a granular analysis published by the NBER, Monetary Tightening, Commercial Real Estate Distress, and US Bank Fragility. Its authors contend that (quelle suprise!) banks have been understating the severity of their current and pretty likely losses on loans to office buildings. Lower interest rates will not bail them out of this distress by much, since it is driven by the lasting shift to work-at-home and the impossible economics of repurposing these assets. From their abstract:
We focus on commercial real estate (CRE) loans that account for about quarter of assets for an average bank and about $2.7 trillion of bank assets in the aggregate. Using loan-level data we find that after recent declines in property values following higher interest rates and adoption of hybrid working patterns about 14% of all loans and 44% of office loans appear to be in a “negative equity” where their current property values are less than the outstanding loan balances. Additionally, around one-third of all loans and the majority of office loans may encounter substantial cash flow problems and refinancing challenges. A 10% (20%) default rate on CRE loans – a range close to what one saw in the Great Recession on the lower end — would result in about $80 ($160) billion of additional bank losses. If CRE loan distress would manifest itself early in 2022 when interest rates were low, not a single bank would fail, even under our most pessimistic scenario. However, after more than $2 trillion decline in banks’ asset values following the monetary tightening of 2022, additional 231 (482) banks with aggregate assets of $1 trillion ($1.4 trillion) would have their marked to market value of assets below the face value of all their non-equity liabilities.

Ouch.

The authors depict this problem as savings & loan crisis level, not Great Financial Crisis level. ...

More:

 
what i am trying to reconcile is the term "equity"

is it bank portfolio assets or is it bank ownership equity

"What is a banks equity?
Capital is sometimes referred to as “net worth”, “equity capital”, or “bank equity”. Bank capital are funds that are raised by either selling new equity in the bank, or that come from retained earnings (profits) the bank earns from its assets net of liabilities."
 
The eye of Sauron destroyed another narrow bank:
This letter below and links to citations within, as well as the estimated timeline was emailed to the U.S. House of Representative's Committe on the Judiciary's Select Subcommitte on Weaponization of the Federal Government ...

03 January 2024

Dear Chairman Jordan:

I am providing you with information on a matter that merits an investigation. Your committee, particularly its Select Subcommittee on Weaponization of the Federal Government is appropriate for Americans like me who wish to see an investigation of the IRS for its targeted investigation of and resulting damages to Euro Pacific Bank (EPB) and its owner Peter Schiff [1, 2].

Schiff started EPB in 2011 after the 2008 financial crisis; the bank tailored its offerings for what depositors demanded - Safe, Digital, and Global banking. EPB provided risk free international banking, foreign currency exchange, investments in precious metal and brokerage accounts, and mutual funds. EPB was a full-reserve (100% reserve) bank - meaning the bank did not lend out depositors’ assets; all accounts at EPB had zero level of risk because deposits are always available. Its account holders could liquidate gold and silver into international currency 24/7, and utilize the funds with bank cards via ATM withdraws or transactions with merchants across 210 countries and territories. ...

More:

 
Custodia bank is suing the Fed. This report says a resolution might come in March:
A court battle between a novel bank that wants to do business in crypto and the Federal Reserve Board is coming to a head.

Zoom in: The central question in this case is whether a politically motivated Fed intervened in a process conducted by one of the reserve banks it oversees, wrongfully denying Custodia Bank a Fed master account.

The big picture: One major unresolved question that reared its head in 2023 relates to Operation Choke Point 2.0.
  • Crypto is arguing that it is being unfairly shut out from key services like banking, whereas bank regulators have justified their arm's-length stance, citing systemic risk.
  • A win for Custodia may not be a broader win for crypto, but could open the door for other banks that want to do business with the industry.
...

More:

 
Last edited:


Caitlin is the founder/CEO for Custodia bank
 
In zero reserve banking news...
Several U.S. banks reported a plunge in fourth-quarter profits on Thursday, hurt by a drop in interest income and charges tied to replenishing a deposit insurance fund.

Higher payouts on deposits to retain customers from chasing high-yielding alternatives have resulted in an industry-wide contraction in net interest margins for the banks that had until recently benefited from the U.S. Federal Reserve's rate hikes.

Potential Fed rate cuts this year will likely further dent margins this year, some banks have warned.

Meanwhile, most U.S. banks are also paying the Federal Deposit Insurance Corporation (FDIC) a fee to refill its insurance fund, used to safeguard customer deposits in case of bank failures.

On Thursday, another top regulator announced plans for new short-term liquidity rules to help lenders respond to bank runs like the ones that crushed three banks last year.
...

More:

 
This X thread is worth reading:

 
Back
Top Bottom