Did you know that the Federal Deposit Insurance Corporation (FDIC) keeps a secret list of problem banks?
These are banks that are at risk of financial failure.
The list is kept confidential, so it is impossible to know for sure if your bank is on it. This is to keep customers in the dark. The last thing the FDIC wants is for people to withdraw their deposits and start a bank run.
The idea is that the FDIC can covertly help banks get their act together by keeping the list confidential. The goal is to prevent bank failures.
To be classified as a problem bank and added to the secret list, a bank must receive a CAMELS rating of 4 or 5 from the FDIC examiners. This fancy acronym refers to the various criteria that the FDIC uses to assess the health of a bank. Specifically, these are capital, assets, management, earnings, liquidity, and sensitivity.
Scores range from 1 to 5. One is best. Number 5 is the worst.
On May 29, the FDIC Quarterly Bank Profiles First quarter of 2024. Of note, 11 banks were added to the FDIC’s list of problem banks during the quarter. This brings the total number from 52 to 63.
Maybe your bank is one of these problem banks. Maybe not. As of Q1 2024, these banks have a total of $82.1 billion in assets. That’s $15.8 billion more than in Q4 2023.
At the same time, unrealized losses on available-for-sale and held-to-maturity securities increased by $39 billion to $517 billion in the first quarter of 2024. This was the ninth consecutive quarter of unusually high unrealized losses since the Fed began raising rates in the first quarter of 2022.
The surge in unrealized losses is a big problem, and I’ll get into that in more detail later, but first, some context is needed.
bank failure
If the FDIC fails to remove a bank from the Confidential Matters List, the bank will be added to another list. This list is also maintained by the FDIC. However, this FDIC list is public and available to the public. this is run list The number of all U.S. banks that have failed since October 1, 2000.
As of this writing, this FDIC list includes 569 bank failures. On average, there are about 24 bank failures per year. Of course, some years are worse than others. Some years are better than others.
For example, from October 24, 2020, to March 11, 2023, no banks failed for approximately 28 months. However, there were 157 bank failures in 2010. This means that a bank fails once every 2.3 days throughout the year, including weekends and public holidays.
By comparison, as of this writing, only one bank has failed in 2024. Republic First Bank (not to be confused with First Republic Bank) closed on April 26.
Last year, in 2023, only five banks failed. These included Silicon Valley Bank, Signature Bank, First Republic Bank, Heartland Tri-State Bank, and Citizens Bank. What’s notable about the FDIC’s 2023 list of bank failures is not their numbers, but their scale.
The biggest bank failure in American history was Washington Mutual Bank. As of September 25, 2008, we had $307 billion in assets on our books.
Next are First Republic, Silicon Valley Bank, and Signature Bank. With assets of $212 billion, $209 billion, and $110 billion respectively, these banks will all disappear from the face of the earth by 2023.
confidence game
If your bank is on the FDIC’s public list, there is nothing you can do. The bank has already failed. In theory, if you have less than $250,000 in deposits at a failed bank, you are protected by the FDIC.
But how safe is your money really?
as part of recent Quarterly Bank ProfileThe FDIC reported that the Deposit Insurance Fund (DIF) balance was $125.3 billion. This is a reserve ratio of 1.17% of total insured deposits. Furthermore, this reserve ratio does not comply with the FDIC’s legal requirements.
The FDIC adopted the DIF Recovery Plan on September 15, 2020. The goal of the plan is to return the reserve ratio to the statutory minimum of 1.35% by September 30, 2028. A lot can happen between now and then. And ultimately, the statutory minimum reserve ratio of 1.35% is simply inadequate.
Our estimates suggest that an insurance reserve of 1.17% (or even 1.35%) of potential obligations is not actual insurance. Rather, these reserves are fake insurance that pays for very vulnerable trusts. This is to maintain customer trust… so that people don’t withdraw all their deposits in times of crisis.
In a real panic, the FDIC reserves would be wiped out in less than a day. And if most depositors have balances of more than $250,000 (as was the case with SVB and Signature Bank), the FDIC’s fake insurance wouldn’t work. Still, trust is the name of the game.
A crisis is brewing
That trust is transferred from the FDIC to the Federal Reserve. In a fiat money system, there is no limit to the amount of credit that can be created out of thin air. But the problem is one of quality.
As the Fed repeatedly issues excessive credit to bail out the banking system, the quality of that credit ultimately turns into toilet paper. However, the actual breakpoint is unknown.
The $517 billion increase in unrealized losses noted above was primarily driven by unrealized losses on mortgage securities, driven by rising mortgage rates. Commercial real estate loans are also at risk. FDIC:
“Reduced demand for office space is driving down property values, and higher interest rates are impacting the creditworthiness and refinancing ability of office and other types of CRE loans. As a result, illiquid interest rates on non-owner occupied CRE loans are currently at their highest level since the fourth quarter of 2013.”
The relationship between real estate and credit is fundamental to the health of the banking system. When the debt on a property is more than the property is worth, the lender cannot recover its losses if the borrower stops making payments. As the FDIC said, this is exactly what is happening.
As this continues and liabilities exceed assets, more and more banks fail, and the FDIC becomes unable to insure all of the customer deposits at risk.
As you may recall, quantitative easing began in the United States in November 2008 and included purchases of mortgage-backed securities. This helped bail out a banking system overburdened with bad mortgages.
When QE1 was first introduced, the Fed’s balance sheet was about $800 billion. Today its value is approximately $7.3 trillion.
The current accumulation of non-performing residential and commercial real estate loans is a crisis situation. What happens when a bank goes bankrupt?
Will the Fed stand by when depositors are wiped out and the financial system risks systematic collapse? Or will the Fed fire up the printing press and buy up all these bad loans?
Recent history points to the latter. So the quality of the dollar will be sacrificed once again.
[Editor’s note: It really is amazing how just a few simple contrary decisions can lead to life-changing wealth. And right now, at this very moment, I’m preparing to make a contrary decision once again. >> And I’d like to show you how you can too.]
thank you,
minnesota gordon
For the economic prism
Returning to the economic prism from crisis
