See below this clip for info on topic….
Dr Doom: “Most banks are technically insolvent” pic.twitter.com/2GlWm6324O
— Peter St Onge, Ph.D. (@profstonge) April 2, 2023
In the event of bank insolvency, the ability of a bank to repay its depositors depends on whether deposits are insured. In countries without deposit insurance, the failure of one bank can lead to a domino effect, leading to a cascade of defaults and bankruptcies that can cripple the economy. To prevent such devastating impacts, governments back deposit insurance, ensuring that deposits are safe and preventing bank runs from occurring. In the US, the national deposit insurance scheme, FDIC, was adopted in 1933 to prevent bank runs that contributed to the Great Depression from ever happening again. In a country with deposit insurance, the assets of an insolvent bank are seized and sold off, and depositors are fully reimbursed using the funds raised and FDIC funds from insurance premiums paid by the banks into the system.
However, despite deposit insurance, a new study has found that 186 banks across the country could fail if half of their depositors quickly withdraw their funds. These banks hold a significant amount of their assets in interest rate-sensitive financial instruments, and the value of those older, low-interest investments dropped sharply as the Federal Reserve hiked interest rates over the past year. The true value of U.S. banks’ unrealized losses amounts to $1.75 trillion, or 80% of their capital.
Source:https://t.co/G4TWdp2oab
— Wall Street Silver (@WallStreetSilv) April 2, 2023
Despite this, most U.S. banks are technically near insolvency, and hundreds are already fully insolvent. Rising inflation reduces the true value of banks’ liabilities by increasing their “deposit franchise,” an asset that is not on their balance sheet. Since banks still pay near 0% on most of their deposits, even though overnight rates have risen to 4% or more, this asset’s value rises when interest rates are higher.
The potential for a bank failure to have a ripple effect on the economy is a significant concern for policymakers, which is why governments around the world implement measures to prevent such events from occurring. Deposit insurance is a key tool used by governments to stabilize the banking system and prevent bank runs.
In countries without deposit insurance, the failure of an insolvent bank could lead to a cascade of defaults and bankruptcies that cripple the economy. Depositors would have to wait in line with other bank creditors to reclaim their money, and the bank would likely only be able to repay a fraction of the amount owed to each customer. This situation can trigger a domino effect as customers and other banks worry about their financial positions and begin withdrawing their funds, which can ultimately lead to a wave of bank failures.
NEW‼️🇺🇸 Hundreds of US banks are already fully insolvent – Nouriel Roubini pic.twitter.com/Jyig9fnRT7
— Radar🚨 (@RadarHits) April 2, 2023
In contrast, deposit insurance ensures that depositors are reimbursed in full if their bank fails. The US implemented its national deposit insurance scheme, the FDIC, in 1933 in response to the Great Depression. Under this system, insolvent banks have their assets seized and sold off, and depositors are fully reimbursed using the funds raised, including FDIC funds from insurance premiums paid by banks into the system. If necessary, the Treasury can lend to the FDIC to make up any shortfall.
However, even insured depositors with $250,000 or less in the bank could face difficulties getting their cash if these institutions face a run, as many banks hold a significant portion of their assets in interest rate-sensitive financial instruments like government bonds and mortgage-backed securities. As interest rates rise, the value of these older, low-interest investments drops sharply, which can reduce the market value of banks’ other assets as well. In fact, accounting for these unrealized losses reveals that most US banks are technically near insolvency, with hundreds already fully insolvent.
Despite these challenges, there are steps that banks can take to reduce their risk of failure, such as diversifying their asset portfolios and implementing risk management practices that account for potential market volatility. Regulators can also play a role in ensuring that banks are adequately capitalized and able to weather potential market shocks.
Humor on it- but actually quite accurate…
Here we have the Fed helping insolvent banks.pic.twitter.com/YAxtoXQx1k
— One Bitcoin (@OneBitcoinCo) April 1, 2023
The Simpsons predicted Bank of America running out of money.
All banks are insolvent, which is why you are unable to withdraw all of your money in one day. pic.twitter.com/7KnHbscNmP
— Big Dog (@BigDog47705764) March 28, 2023
The key takeaways from this…
- Insolvency occurs when a bank cannot repay its depositors because its liabilities exceed its assets, which can have a ripple effect on the economy.
- In countries without deposit insurance, an insolvent bank can trigger a cascade of defaults and bankruptcies.
- Deposit insurance is a key tool used by governments to stabilize the banking system and prevent bank runs.
- Even insured depositors could face difficulties getting their money if banks face a run.
- Most US banks are technically near insolvency, with hundreds already fully insolvent.
- Diversifying asset portfolios, implementing risk management practices, and ensuring adequate capitalization can help reduce the risk of bank failure.
Want to know more?
It was all part of the plan to destroy the petrodollar making US money worthless. As we speak we will soon be an insolvent country that will be dependent on programmable CBDCs. Who do you think owns and runs the central banks? Not the US or any country. We will be Venezuela pic.twitter.com/RyUoonOCYC
— poetic justice (@EplurebusUnum) April 1, 2023
W. Diaz, Freelance Writer for Whatfinger News
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