October 2, 2023
Silicon Valley Bank (16th largest in the U.S.) Signature Bank, First Republic Bank, and banking giant Credit Suisse (Switzerland’s second-largest) —all collapsed within 12 days during March 2023 — not exactly ancient history, a preview of coming attractions. The FDIC only insures deposits up to $250,000, but Biden arbitrarily (i.e., illegally) declared all depositors would be made whole. And the rest of the banking system would be charged a special assessment to pay for the cleanup, further weakening an already fragile system.
The overall banking system, apart from the specific problems dooming these individual banks, is in a tenuous state due to having parked funds in U.S. Treasury bonds. As interest rates rose, the value of those bonds — paying low rates of interest — plummeted. S&P and Moody’s downgraded multiple banks in August 2023 due to concerns regarding liquidity. Banks are being squeezed by underwater bond portfolios, having to pay higher rates to depositors, and losses (and potential future losses) from carnage in commercial real estate. If a large enough number of depositors demand their money back, banks now have no place to obtain it.
FDIC depository limits provide an important perspective on the history of inflation. When first introduced in 1934, the limit was $2,500, 1% of the current $250,000. The 89 intervening years were a textbook example of how to destroy a currency and the democracy which created it. The limit was last raised in 2010, but is apparently now hopelessly inadequate. The FDIC was created in response to the collapse of over 9,000 banks in the previous four years. It performed as intended and staunched the bleeding. But only for a time, which is rapidly approaching a close.
With electronic banking now ubiquitous, bank runs can occur almost instantaneously. There is no longer any need to wait in line. Social media and online news accelerate the pace of bank runs. It has never been a secret that the FDIC is only able to cover the assets of a small percentage of banks. It is not equipped to insulate the entire banking system from a calamity. “Credit” originates from the Latin credere, to believe or trust. The banking system resides atop a foundation which can evaporate overnight.
The overall impact of the March events was to further consolidate an already over-consolidated industry (Too Big to Fail) and to exacerbate existing credit tightening motivations. Since the Depression, each banking crisis has ensured the final one will be far worse. Bailing out everyone conditions individuals to fail to exercise due diligence — either in investigating the financial condition of institutions they deposit funds in, or in spreading their money across multiple institutions. In a fractional reserve banking system, banks are by definition highly leveraged, with a small percentage of deposits in relation to the amounts lent out. During a substantial price deflation, when faced with mounting loan defaults, many banks will inevitably fail. The March 2023 bank failures served as an early warning of far more substantial events in the future.
Would you buy a used banking system from this lady?
The dislocations introduced by pandemic lockdowns should not be underestimated. Some of these impacts are slowly working their way through the banking sector. Besides the many businesses forced under, behavioral changes were produced, including remote work and flight from urban centers. The latter two combined to degrade the commercial real estate market. Flight of the upper classes from cities and states leaves those left behind with increased tax bills. While some regions prospered, others were left in worse shape by internal migrations. Bidenmonics, and the accompanying police defunding and soft-on-crime policies — along with unfettered illegal immigration, fentanyl, criminal gangs, etc. — bring with them enormous costs for businesses and taxpayers, especially in urban areas. Insurers, bankers, retailers, etc. are all burdened. A vicious cycle is now underway, draining the nation’s largest cities of productive citizens and funds. Banks invested in such areas are particularly challenged.
California’s PacWest bank, after months of increasing losses, was forced to merge with the larger Banc of California in July 2023. Based in Los Angeles, this is yet another example of the challenges facing banks in regions hostile to good government. Each banking crisis results in further consolidation of the industry. From 2008 to 2013 14% of banks disappeared. Nomura Holdings anticipates this decade may see a further 50% reduction in institutions. The fewer banks, the greater the systemic risk.
Mutually exclusive contemporaneous headlines:
Governments always lie. But the Biden administration has taken this art to new highs. In so many ways. The foundation of lies underlying Bidenomics is particularly shaky. Bank regulators, regardless of the administration, never publicly admit to weakness in the banking system. Anything otherwise risks triggering bank runs. These two headlines tell us all we need to know regarding the economy’s future direction. Santa is unlikely to bring retailers a robust holiday season this year. Reading between the lines, when the Treasury Secretary publicly warns of banking weakness, it is clear we are no longer in a credit expansion regime. The trend is now down.
The overall banking sector is beginning to display early signs of deterioration. During the pandemic, when the economy was artificially stimulated, delinquent loans diminished substantially and are slowly beginning to increase. Note the $15 billion/quarter ($60 billion/annual) rate of nonperforming loans at the start of the lockdowns, compared to the single-digit billions currently.
Yet when examined from the standpoint of how much banks have been writing off once these nonperforming loans transfer from delinquent status to hopeless, the picture is far less sanguine. This rate has reverted to the level at the lockdown start.
