The Federal Reserve Board reduced banking reserve requirements to zero in March 2020. So banks in the United States are technically not required to back customers' deposits with anything.
Even as Chairman Jerome Powell had previously insisted that the Fed already had all the "tools" it would need to handle any crisis, the Fed created an extravagant new tool in response to the failures of Silvergate Bank, Silicon Valley Bank, and Signature Bank.
The Fed's new Bank Term Funding Program (BTFP) is a modified bank bailout program, and it's being accessed by other banks now buckling under pressure from their bad investments and fleeing depositors.
So what happens next?
Many in the U.S. wonder when other regional banks will fail or if the world's largest banks will take them over.
This 0% reserve requirement policy makes further bank collapses more likely.
But other negative forces are also at work.
The difference between these recent banking collapses and the 2008 crisis is how they started. The problems at Silicon Valley Bank stemmed from a bank run, triggered by big write downs of losses on the bank's bond portfolio and a huge proportion of uninsured deposits.
Depositors fled due to a well-founded fear of SVB's insolvency.
Fifteen years ago, that financial crisis originated from subprime housing loans. Then, there was a combination of risky bank borrowing, poor regulation, and little capital. A 2% drop in the value of those bad loans was enough to wipe out some banks' capital.
The current banking industry appears no more equipped to prevent a 2008-style crisis. Twitter and Reddit even have hashtags like #bankrun trending every week.
Ordinary people who work for taxable wages or own small businesses don't think it is fair that "too big to fail" bankers receive bailouts.
As has been quipped, "Capitalism without bankruptcy is like Christianity without Hell." There have to be consequences and accountability.
Many questions are being raised surrounding banking reform policy to improve the integrity of banks and prevent future SVB-style issues:
- Should banks keep more cash on hand to reduce risk?
- Does the FDIC's deposit insurance fund need more capital to cover the pending future failures?
- Is the Fed going to come up with endless rescue packages?
The Federal Reserve Bank created the "Bank Term Funding Program" to give banks accesss to liquidity without being forced to sell their losing investments.
BTFP offers loans to banks under more accessible terms than the Fed typically provides. For example, banks can post collateral valued at 100 cents on the dollar rather than marking it to its current market value — i.e., much lower since the Fed began raising interest rates a year ago.
In other words, banks get to lever up against securities (usually bonds) with deeply impaired values – as though they were still worth their original value!
A Broken Chain Reaction
- Banks need to keep more cash to cover sudden deposit redemption.
- The whole system is based on confidence, and trust is disappearing rapidly.
- Anyone familiar with how fractional reserve banking functions understands there are inherent risks to lending your money to a bank.
Since most banks are still trying to get away with paying paltry interest rates (to try to make up for their losses elsewhere), depositors are now incentivized to yank their deposits and obtain a much higher rate of return on their money elsewhere.
Banks sometimes brag that they exceed the 0% reserve threshold. At the end of December, Bank of America had 2% of its $1.93 trillion in cash. JPMorgan held 2% of its $2.3 trillion in deposits in cash. How lame.
Bank runs are not over. The Fed and the FDIC are also perpetuating this problem by backstopping banks that take on excessive risk.
The Fed has pushed interest rates from nearly zero to almost 5 points in 12 months. These fast and furious rate hikes have broken the financial system because banks locked themselves into long-term bonds when rates were low.
This will end poorly for savers and investors unless they have physical gold and silver.
The credit crisis is getting worse. Banks will use terms like "liquidity crisis" instead of "insolvency."
Gold and silver shine in times of such systemic risk.
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