Up till the 2008 subprime mortgage financial crisis exploded and toppled a number of famous banks, you could have easily believed along with the majority of the world that they were secure institutions. The recession exposed it as mislead hope. Once to the toxic assets banks held had spread exponentially, they went broke as the losses plied up.
The lists of bankrupted large and important institutions were too many to remember. Included were the “too big to fail” giants such as Merrill Lynch, Lehman Brothers, Washington Mutual, Bear Stearns, and Wachovia. Eventually they were all liquidated or bought out by other banks in shotgun style weddings. All facilitated by the Treasury and Federal Reserve.
The U.S. Fed has been on a mission ever since then to fake the smoke and mirrors of financial system stability. A significant portion of this effort came in the form of the important Dodd-Frank Act, officially titled the Wall Street Reform and Consumer Protection Act. The Government passed this in 2010 in an attempt to make the remaining banks appear to be safer.
Fast forward to six years again, and you may be lead to believe again that the banking system is secure, stable, and sound. Recent statements from top financial regulatory officials have suggested the complete opposite.
Recently it was the Vice Chairman of the FDIC that insures consumer bank accounts who stated he thought that the system “too easily allows banks to conceal risk.” In addition, he believed that the banking system reserve capital is too “inadequate for bank resiliency.”
Then following soon afterwards, the former United States Treasury Secretary Lawrence Summers contributed his voice to the critics. He claimed that the banking reform regulations had not made the U.S. banking system any safer.
Summers claimed in his paper, “To our surprise, we find that financial market information provides little support for the view that major institutions are significantly safer than they were before the crisis and some support for the notion that risks have actually increased.”
Weaknesses In The U.S. Banks
He had three significant reasons to believe that this is the case. The first is because the American banks have been given numerous deadline extensions to selling off their risky assets. The Volker rule stated that they were not to engage in investment practices which were risky and did not provide any benefit to their customers.
The banks had a deadline in 2012 to sell off their risky assets. But they did not make that, so they requested deadline extensions again and again. Eventually they succeeded in getting the deadline delayed till 2022. A total of ten years after the first date.
They complained that there are no buyers at full value for the risky assets. If they had to sell off these assets right away, they would take horrendous losses which would dangerously reduce their capital levels. Neither the banks nor their concerned regulators want to see that happen.
The second issue in the banking system is that the banks’ reserve cash pile is significantly insufficient to cover any potential losses on their books. This cash is the emergency fund of any bank. Government regulators were meant to ensure that American banks keep more capital on hand. However the rules include numerous loopholes which permit them to hind their financial condition.
The Third problem with the U.S. banks today is that the bank stress tests that are intended to guarantee their robustness are only an illusion. Bloomberg has reported that these stress tests allow for a minuscule volume of equity capital of $4 for every $100 of assets. This is meant to keep markets reassured that the American banks will remain solvent in a crisis. Bloomberg’s final evaluation was that “these flaws make a passing grade almost meaningless.”
Further Banking Issues In Europe
Italy’s eight largest banks were already massively struggling. That was even before the political uncertainty exploded with Brexit leading to Great Briton leaving the E.U. Third largest Italian banking institution Monte Dei Paschi was in the later stages of its most recent attempt to strengthen its languishing financial state with a 5 billion Euro capital raising effort. While at the same time it was trying to dump 28 billion Euros worth of bad debts off its books. Thanks to the E.U. instability Investors may now walk away from the effort, forcing the Italian Government to wade into the swamp.
Other troubled big banks like Banca Carige of Genoa are also under guidance to rebuild their failing balance sheets. All thanks to the European Central Bank and their stress tests. These Italian banks are similarly hemorrhaging beneath the immense dead weight of over 360 billion Euro of loans gone bad.
This should in itself be enough to concern you over your investments. However Italian banks are not the most significant in Europe or globally. However Italy’s biggest bank UniCredito is one of the “too-big-to-fail” globally important financial institutions whose stability is now of concern. Other large European banks are wavering with their own issues. This includes Germany’s largest lender Deutsche Bank which may itself require a German or ECB cash injection shortly.
European and US banks are not the only issue unfortunately
Another terrifying thought is the Chinese banking system. The Chinese economy has been powering ahead on borrowed money that has been pumped into the economy by the central and regional economies. ICBC is rated by many as the largest bank in the world thanks to the love affair the Chinese economy has with debt fueled growth. Should another global recession hit and China is no longer able to maintain its weakening grip on its growth rates, debts could start piling up faster than has ever been experienced globally.
China Buying Gold
Perhaps this has been why the Chinese government has been stock piling to gold. Not only that but the government actively encourages its citizens to but gold and holds it for a rainy day. The Chinese Government might be foreseeing the eventuality when it needs to start liquidating its gold reserves. When this finally comes about, it is likely that gold will have again seen exponential growth like in 2007-2009. If it does it will be a home run investment by the government allowing it to profitably sell off and help save their banks.
The Chinese Government is anything but foolish these days. They don’t just think ahead to winning the next election so they can hold their jobs. They play the long game and plan big. Even those like us should be paying attention and building a gold back up plan as well. They know what the numbers look like. See the table below: