![]() This would basically be the safest possible bank, but if it were allowed to exist it could suck deposits out from other banks, threaten the whole fractional-reserve banking model, and reduce the Federal Reserve’s ability to control monetary policy. and others, have attempted to make bank models that just store all of their assets as cash at the Federal Reserve and therefore operate full-reserve banks, but they have not been allowed by the Federal Reserve to exist. They can protect depositors against individual bank failures, but they don’t have enough to prevent against system-wide banking failures, unless they draw in aid from elsewhere or are backstopped by Congress with a fiscal bailout. However, at any given time, FDIC only has about 1% of bank deposits’ worth of insurance in their fund. To help normalize that and make it seem less weird, the FDIC provides insurance against deposit losses up to $250,000 which mitigates some of the risk. 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.įrom 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. The rest is backed up by less liquid securities and loans.īack in 2008, banks had 23 dollars of deposit liabilities for every dollar they had in liquid cash, which is insanely leveraged and illiquid. 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. Somewhere around $100 billion of it ($0.1 trillion) is held by banks in the form of actual physical banknotes in vaults and ATMs. Federal Reserve, and so it is not tangible. The majority of this cash is just a ledger entry with the U.S. 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.īanks currently have just $3 trillion in cash to back up their $17.6 trillion in deposits. They offer very low interest rates, especially for checking and savings accounts.ĭeposits 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. That’s what you and I consider to be our “money”. ![]() The majority of bank liabilities are deposits for individuals and businesses, and these deposits currently total $17.6 trillion. 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. In the United States, the banking system as a whole has $22.9 trillion in assets and $20.7 trillion in liabilities. 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. Large banks in general are better-positioned, including to take some market share from those smaller banks. 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. ![]() While this particular bank had a solvency problem, and some others like it also have a solvency problem, the majority of U.S. 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. In just a two-day stretch between March 8th and March 9th, it faced a bank run and collapsed. 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. ![]() Treasury Department, Federal Reserve, and FDIC to prevent bank runs across small and medium-sized banks. history this past Friday, followed by a combined liquidity backstop on Sunday night by the U.S. banking system have led to the second largest bank failure in U.S. ![]()
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