Is your bank safe? - there will be no more bank 'bailouts'
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
- Most people don't realize that the banking system issues have not really been fixed.
- You must understand the relationship you have with your bank as well as the strength of your bank's balance sheet.
- It behooves every investor to make sure that their money is in a safe bank, and there are not very many of those in the US.
When things are going well, no one is really concerned with how safe is their particular bank. But when we move into a financial crisis, some then become concerned, but most still go through their lives oblivious to their banking issues. And, when the minority of people become concerned it is usually too late to do something about it. The time to prepare is when things are still relatively good.
So, I'm going to try to explain to you why now is the time for you to become concerned and to consider doing something about it.
In 2007-2008 the world experienced a financial meltdown, the likes of which had not been seen since the Great Depression. However, amazingly, there were no major cash runs on the banks worldwide, while some did go out of business. Does the individual investor really not understand the precarious situation that is inherent within our banking system? I seriously believe that the answer to this question is a resounding "no."
Furthermore, as our largest banks still own approximately the same ratio of assets they did in 2007, it is clear that the causes of the banking crisis of 2008 has been greatly ignored. Further expected weakness within smaller banks will also cause further consolidations, which will ultimately cause that ownership percentage to further rise along with the risks within our banking system.
During the financial crisis several years ago, Hank Paulson, director of the US Treasury and Ben Bernanke, president of the Fed, saw all too well that there was a true lack of liquidity within the US banking system. Although, this would never be admitted to publicly, banks are truly undercapitalized in terms of actual depositors' money on hand to meet any serious liquidity issues within our markets.
Paulson recognized during this period that the seriously overleveraged nature and poor capitalization of US banks would ultimately lead to a run on all banks, with the average citizen not realizing that she had lost everything until it was too late for her to do anything about it.
In fact, there is only approximately $100 billion in actual cash greenbacks in the US vaults and at the Fed. If you compare this figure with the estimated $90 trillion worth of dollar-denominated credit outstanding (and a true number really is not attainable due to many different factors, with the true number likely being even higher), it becomes abundantly clear that the actual cash on hand is insufficient backing for the total denominated credit outstanding. This ratio is over $9000 of debt for each dollar of greenback available to backstop such debt.
And, if you think that the FDIC has your back, well, consider that in the third quarter of 2010, the FDIC's contingent loss reserve was drained by $6.2 billion, which brought the Deposit Insurance Fund deficit in 2010 to over $21 billion. Furthermore, by that time, the FDIC had already burned through its entire 2010 assessments. Luckily, the market stabilized. But, consider what would happen if we went into a protracted bear market?
Have we learned our lessons regarding our banking system? In hindsight, the powers-that-be finally recognized – only behind closed doors -- that the signing into law by Bill Clinton of the Gramm/Leach/Bliley Act, which effectively repealed the Glass-Steagall Act, directly contributed to the severity of the financial crisis we experienced during 2007-08. During this financial crisis, we were told by these same people that the largest banks in America were too big to fail, even though they recognized that this caused significant risk to our banking system.
In 2002, the top 10 banks owned 55% of the total US banking assets. However, over the last several years, the regulators and others who are charged with the oversight of our banking system have not reduced the risk in our banking system. In fact, now 10 banks own approximately the same percentage of all US banking assets as they did in 2007, with the top 4 owning approximately 35%. This means that the inherent dangers that caused the major problems of the 2008 financial crisis have not truly been fixed.
This brings me to our next major issue. Although you may feel that you have a credit balance in your bank account, please realize that your credit balance is only as safe as the underlying bank's assets. Since a bank's assets are generally the loans it owns, the underlying loans of your bank are actually your problem. In fact, most people do not realize that the bank is not a simple depository agent for money. In other words, you cannot simply walk in and demand your money on the spot at any time (assuming you have more than $5,000 in your account). In truth, the relationship you have with your bank is that of a debtor/creditor.
Yes, the legal fact is that the money you have deposited into your bank is a loan you have made to your bank, for which you earn interest. The bank then takes your money and loans it to others, and makes money based upon the differential in interest rates as well as fees. Therefore, just like being in the shoes of any other creditor, if your debtor is on shaky financial ground and your money is sitting in bad loans, this ultimately becomes the problem of the creditor, i.e. you, the individual. And, the percentage of the public that truly understands this legal reality is still relatively insignificant.
Therefore, it is up to the individual investor to ignore the enticing commercials with all their gimmicks that they see regarding various banks and to not simply look for the most convenient banking relationship they can find. Rather, as an individual investor armed with the knowledge that has been presented here, you must take matters into your own hands today, and actually do your own due diligence regarding the bank to which you entrust your money for "safekeeping."
You need to understand and focus on several factors in order to determine if your chosen bank is safe: Most importantly, issues such as liquidity, loan to asset ratios and the quality of the underlying security for the banks' loans. At the insistence of our members, we have done extensive research to find some of the strongest banks in the country to prepare for the extended bear market I foresee beginning as we move into the second half of this decade.
Our ranking system focuses on 4 main categories -- 1) Balance Sheet Strength, 2) Margins & Cost Efficiency, 3) Asset Quality, and 4) Capital & Profitability -- each divided into 5 sub-categories. We then assigned a score of 1-5 for each of these 20 key areas to provide as thorough a ranking as we can and attain reasonable assurance that these are as safe as we would prefer in order to put our own money into them. And, out of over 4000 US banks, we have found a very limited number of what we would consider truly safe banks.
Ultimately, it is your money, and you need to protect and safeguard it, since no one else will be able to do so for you when the next banking crisis hits us. In my next article, I will outline how some of the largest banks are getting ready for the next banking crisis, and expect that your deposits will fund their "bail-in" when things go bad.