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The Banking Crisis is Worse than Reported

There has been a lot of speculation as to why the second and third largest bank failures in US history occurred in the last ten days. The populist wing blames speculative frenzies due to overzealous venture capitalists demanding that their uninsured deposits must be protected to preserve the investment capital and innovation in America’s economy. The leftist wing says the “little guy” dosen’t deserve to have his paycheck bounce and must be protected from financial chicanery.

However the report on Friday by a research group indicated up to 186 more small to midsize banks could fail said the following (from the abstract):

Marked-to-market bank assets have declined by an average of 10% across all the banks, with the bottom 5th percentile experiencing a decline of 20%. We illustrate that uninsured leverage (i.e., Uninsured Debt/Assets) is the key to understanding whether these losses would lead to some banks in the U.S. becoming insolvent– unlike insured depositors, uninsured depositors stand to lose a part of their deposits if the bank fails, potentially giving them incentives to run. A case study of the recently failed Silicon Valley Bank (SVB) is illustrative. 10 percent of banks have larger unrecognized losses than those at SVB. Nor was SVB the worst capitalized bank, with 10 percent of banks having lower capitalization than SVB. On the other hand, SVB had a disproportional share of uninsured funding: only 1 percent of banks had higher uninsured leverage. Combined, losses and uninsured leverage provide incentives for an SVB uninsured depositor run. We compute similar incentives for the sample of all U.S. banks. Even if only half of uninsured depositors decide to withdraw, almost 190 banks are at a potential risk of impairment to insured depositors, with potentially $300 billion of insured deposits at risk.

(emphasis is mine)

Tonight, on a night where most of America is slumbering through a spring break party in Florida, watching the NCAA men’s championship, or just relaxing during an early spring weekend, this headline and story drops on Bloomberg at 5:03 p.m. ET on a Saturday:

Midsize US Banks Ask FDIC to Insure All Deposits for Two Years


A coalition of midsize US banks asked federal regulators to extend FDIC insurance to all deposits for the next two years, arguing the guarantee is needed to avoid a wider run on the banks.

“Doing so will immediately halt the exodus of deposits from smaller banks, stabilize the banking sector and greatly reduce chances of more bank failures,” the Mid-Size Bank Coalition of America said in a letter to regulators seen by Bloomberg News.

(emphasis is mine)

Pardon me? Since when is a guarantee needed to avoid a “wider run on the banks” if the banks are insured an sufficiently, or better yet, financially stable enough after fifteen years of regulatory reform under Dodd-Frank?

More from the article:

“It is imperative we restore confidence among depositors before another bank fails, avoiding panic and a further crisis,” the organization wrote. “While the cost of deposit insurance is not insignificant, the likelihood of it being needed is much, much smaller should all deposits be temporarily insured.”

(emphasis is mine)

So the “it’s contained” bullcrap isn’t going to fly this time. Buckle up America, and the world; it is about to get insane in the US of A.

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