You want numbers? This woman has numbers.
From Lyn Alden's Newsletter, March 13:
In the United States, the banking system as a whole has $22.9 trillion in assets and $20.7 trillion in liabilities. The problem, of course, is that their assets are riskier and less liquid than their liabilities, and so they face both liquidity risks and solvency risks if things aren’t managed well, or if they face external shocks that are larger than they can deal with.....Recent challenges in the U.S. banking system have led to the second largest bank failure in U.S. history this past Friday, followed by a combined liquidity backstop on Sunday night by the U.S. Treasury Department, Federal Reserve, and FDIC to prevent bank runs across small and medium-sized banks.
Silicon Valley Bank was a top-20 bank in the United States by asset size, and a large percentage of venture capital backed startups in the country had a connection with them. In just a two-day stretch between March 8th and March 9th, it faced a bank run and collapsed. Their CEO was also a board member of the Federal Reserve Bank of San Francisco, which is one of the twelve “bankers’ banks” that make up the Federal Reserve System.
While this particular bank had a solvency problem, and some others like it also have a solvency problem, the majority of U.S. banks are still solvent. It’s the liquidity that is the key problem for most of them, especially for small and medium-sized banks, and that situation may keep deteriorating for them.
Large banks in general are better-positioned, including to take some market share from those smaller banks.
This newsletter issue covers some of the nuances of what has been going on in the banking sector, and how to navigate some of the potential landmines among banks going forward.
Fractional Reserve Banking 101
We can quantify this another way. The majority of bank liabilities are deposits for individuals and businesses, and these deposits currently total $17.6 trillion. That’s what you and I consider to be our “money”. They offer very low interest rates, especially for checking and savings accounts.
Deposits are fractionally-reserve bank IOUs; when you see $10,000 in your account balance for example, that figure is not actually backed up by dollars. Instead, that figure is backed up by a broad mix of less-liquid assets including Treasuries, mortgage loans, credit card loans, business loans, a bunch of other assets, and then a small percentage of actual dollars.
Banks currently have just $3 trillion in cash to back up their $17.6 trillion in deposits. The majority of this cash is just a ledger entry with the U.S. Federal Reserve, and so it is not tangible. Somewhere around $100 billion of it ($0.1 trillion) is held by banks in the form of actual physical banknotes in vaults and ATMs. So, the $17.6 trillion in deposits are backed up by just $3 trillion in cash, of which perhaps $0.1 trillion is physical cash. The rest is backed up by less liquid securities and loans.
Back in 2008, banks had 23 dollars of deposit liabilities for every dollar they had in liquid cash, which is insanely leveraged and illiquid. Due to quantitative easing and a slew of new requirements, their ratios aren’t that high anymore, and so it’s more like a 5x or 6x ratio these days.
From a depositor perspective, banks are basically highly-leveraged bond funds with payment services attached, and we treat it as normal to keep our savings in them....
....MUCH MORE
