U.S. banks are not sound, says federal report

Every year since 1977, three powerful agencies — the Federal Reserve Board of Governors, the FDIC (Federal Deposit Insurance Corporation), and the Office of the Comptroller of the Currency — undertake a review of America’s banks, specifically of their large syndicated bank loans — all loans of $20 million or greater that are shared by three or more financial institutions.
The annual review typically starts in March, with the results published around the beginning of the third quarter as the Shared National Credit Review (SNCR).
broken-piggy-bank
According to international investor Simon Black of Sovereign Man, this year’s SNCR was published last week, which says U.S. banks are not sound:

Late last week, a consortium of financial regulators in the United States, including the Federal Reserve and the FDIC, issued an astonishing condemnation of the US banking system.

Most notably, they highlighted “continuing gaps between industry practices and the expectations for safe and sound banking.”

This is part of an annual report they publish called the Shared National Credit (SNC) Review. And in this year’s report, they identified a huge jump in risky loans due to overexposure to weakening oil and gas industries.

Make no mistake; this is not chump change.

The total exceeds $3.9 trillion worth of risky loans that US banks made with your money. Given that even the Fed is concerned about this, alarm bells should be ringing.

Simon Black explains that in banking, there are three primary types of risk from the consumer’s perspective:

1. Fraud Risk: Is your bank stealing from you?

The case of MF Global shows that fraud in the Western banking system is clearly not zero. MF Global was once among the largest brokers in the United States. But in 2011 it was found that the firm had stolen funds from customer accounts to cover its own trading losses, before ultimately declaring bankruptcy. See:

2. Solvency risk: Does your bank have a positive net worth?

Like any business or individual, banks have assets and liabilities. For banks, their liabilities are customers’ deposits, which the bank is required to repay to customers. Meanwhile, a bank’s assets are the investments they make with our savings. If these investments go bad, it reduces or even eliminates the bank’s ability to pay us back.

This is precisely what happened in 2008; hundreds of banks became insolvent in the financial crisis as a result of the idiotic bets they’d made with our money.

3. Liquidity risk: Does your bank have sufficient funds on hand when you want to make a withdrawal or transfer?

Most banks only hold a very small portion of their portfolios in cash or cash equivalents, not just physical cash, but high-quality liquid assets and securities that banks can sell in a heartbeat in order to raise cash and meet their customer needs to transfer and withdraw funds.

For most banks in the West, their amount of cash equivalents as a percentage of customer deposits is extremely low, often in the neighborhood of 1% to 3%. This means that if even a small number of customers suddenly wanted their money back, and especially if they wanted physical cash, banks would completely seize up.

Black writes, “Each of the above three risks exists in the banking system today and they are in no way trivial. Now we have a report from Fed and the FDIC, showing their own concern for the industry and foreshadowing the solvency risk.”

The following are excerpts from the Federal Reserve’s press release on this year’s Shared National Credit Review, Nov. 5, 2015:

Credit risk in the Shared National Credit (SNC) portfolio remained at a high level, according to an annual review of large shared credits released today by federal banking agencies. […]

Leveraged lending, which accounts for approximately one quarter of the SNC portfolio, remained a focus of the agencies. This year’s review found that banks are making progress in aligning their underwriting practices with the leveraged lending guidance issued by regulators in 2013. However, the review highlighted continuing gaps between industry practices and the expectations for safe and sound banking. Leveraged transactions originated within the past year continued to exhibit structures that were cited as weak by examiners. The persistent structural deficiencies found in loan underwriting by the agencies warrant continued attention.
The review also noted an increase in weakness among credits related to oil and gas exploration, production, and energy services following the decline in energy prices since mid-2014. Aggressive acquisition and exploration strategies from 2010 through 2014 led to increases in leverage, making many borrowers more susceptible to a protracted decline in commodity prices.
Oil and gas commitments to the exploration and production sector and the services sector totaled $276.5 billion, or 7.1 percent, of the SNC portfolio. Classified commitments–a credit rated as substandard, doubtful, or loss–among oil and gas borrowers totaled $34.2 billion, or 15.0 percent, of total classified commitments, compared with $6.9 billion, or 3.6 percent, in 2014.

To read the 2015 Shared National Credit Review in PDF, click here.

Black’s advice, other than finding a safer banking jurisdiction are:

  1. Hold physical cash. Physical cash serves as a great short-term hedge against all three risks, with the added benefit that there’s no exchange rate risk. All you have to do is go to your nearest ATM machine, take out a small amount at a time and build up a small pool of cash savings.
  2. Own real assets, e.g., real estate property, gold and silver. There may be a time where we are faced with the consequences not only of a poor banking system, but also of decades of wanton debt and monetary expansion. At that point, the only thing that will make any sense at all is direct ownership of real assets.

~Eowyn

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Christian Zionist
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Reblogged this on Exposing Modern Mugwumps.

DCG
Admin

What happened in Greece should be a wake up call to citizens here. It’s not a pretty picture.

Anonymous
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Anonymous

True. But this is Gen Y we’re talking about today…comment image

frohky
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frohky

…and Cyprus.

Steven Broiles
Member

Everyone please do whatever you can to get your cash out of the bank. Things are going to get very bad soon. The Fed and the system we’re under can only keep this game going for so long.
And DON’T rely on the FDIC: They only have about 8 to 14 billion to cover customers’ savings of over $11 Trillion.

frohky
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frohky

WHY AMERICAN BANKS ARE NOT SOUND ‘Fiat currencies are the root cause of all the economic problems in the U.S. and Europe.’ -The National Inflation Association “It is well that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” — Henry Ford ‘For Americans, financial and economic Armageddon might be close at hand. The evidence for this conclusion is the concerted effort by the Federal Reserve and its dependent financial institutions to scare people away from gold and silver by driving down… Read more »

Auntie Lulu
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Auntie Lulu

For some time, actually before 2000, I have been concerned about “just how safe is my money in the bank.” I really don’t think it is very safe. We have heard more than one story of an American bank questioning a depositor the “reason why they need their money.” Actually, I feel that is none of their bloody business. I recently closed an account, which had $6,000 in it. Because I had heard these rumors of banks making you give them a “reason why you need your money,” I had already thought up what I was going to say .… Read more »

MomOfIV
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MomOfIV

“For most banks in the West, their amount of cash equivalents as a percentage of customer deposits is extremely low, often in the neighborhood of 1% to 3%.”
makes one wonder if local banks hold such a small amount of depositor’s cash, where is the rest of it held?
This system is set up so that a run on banks would be hugely unsuccessful. The banks and corporations control everything…just the way they like it.

josephbc69
Guest

Yes, MomOfIV, this is a crucial point: “For most banks in the West, their amount of cash equivalents as a percentage of customer deposits is extremely low, often in the neighborhood of 1% to 3%.” The truth is that the rest –97 to 99%– is FICTITIOUS: it doesn’t exist as currency, only electronic sleight-of-hand shown as book-keeping operations in the chequing account created for you when you ‘qualify’ for a ‘loan’. Consider this: how does one ‘qualify’ for funds –or pay them down– which one doesn’t have because s/he cannot SAVE enough from their current income? Are you going to… Read more »

MomOfIV
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MomOfIV

the banks control us with the stroke of a keyboard and in return, we give them our valuable possessions.
I firmly believe GMOs are blasphemy and an affront to God’s natural order….let the wealthy eat GMOs (of course we know they aren’t), I’ll stick with raw and organic thank you very much. 🙂

joandarc
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joandarc

Thank you Dr. Eowyn for this incredible post. It is interesting that we are now being advised to keep an ample amount of cash on hand.