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

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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).
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.


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0 responses to “U.S. banks are not sound, says federal report

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

  2. 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.

    ‘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 their prices.’ -Dr. Paul Craig Roberts, former head of policy at The U.S. Treasury Department
    “A private central bank issuing the public currency is a greater menace to the liberties of the people than a standing army.” -Thomas Jefferson
    ‘What the Fed is doing is simply keeping the system going as long as it can. I don’t see how they can avoid a crash. If they stop QE it’s going to crash; if they don’t stop it, it’s going to crash later. So the Fed is manipulating everything to keep the system intact. And to repeat myself, they can do that, until there is a run on the dollar, and when there is a run on the dollar they lose control. At that point, [the price of] gold and silver will explode.” former Treasury official Dr. Paul Craig Roberts
    ‘Year after year, leftists run for office promising to solve the very problems they helped create via central planning and distortion of the U.S. economy. In fact, they have nothing to show for it but dependency and perpetuation of their own power, which was the real objective all along.’ -Daniel Horowitz

  4. 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 . . . in a most convincing manner, I told the clerk that I was purchasing a “wonderful” car from my neighbor–and he wanted payment in cash. Oh! How happy I was to get such a good deal, blah, blah, blah.” I have no doubt that they questioned my sincerity. Yes, I am guilty of lying, but –What Business is it of Theirs Why I Want My Money. The old adage is applicable here . . . “Ask me no questions, and I’ll tell you no lies.” I’m feeling like I need to remove some money from another bank. So on Thursday, I will be going to another bank, this time I need funds to pay my property taxes (Wink! Wink! I mailed my taxes in last week.) It is criminal that bankers in this country have indulged themselves in all this risky investment . . . not with their own monies, but in the hard earned money that you and I deposited with them for safe keeping. I think the old time banking system of our grandparents is really quite wise–you know, under the mattress, or in a fruit jar buried in the garden.
    This is a great post, and certainly one which gives a message that should be heeded. Thank you Dr Eowyn.

  5. “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.

    • 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 win a lottery?
      If that’s the case –and it surely is– then how the Hell is anyone able to pay off a loan PLUS usury –I mean, INTEREST–!
      And THAT is why the earlier Roman Catholic Church condemned banking, and put usury at the very top of its list of sins –even above murder, which was understood as a crime of passion– for very good reasons! For as the Greeks knew and stated, “Money shall not –CANNOT– breed money.” That is, it is an unnatural ‘creation’ which denies God and puts humans in charge of deciding what can come into being.
      And by the bye, this is why as a scientifically trained horiculturalist I oppose GMOs, even though I am a recognised plant breeder with a new plant registered at the Canadian Ornamental Plant Foundation in Ottawa: GMOs are unnatural & God-denying, but as a scientist I can’t say that, dontcha know?

      • 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. 🙂

  6. 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.


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