As a banker and economist, I am riveted by the expeditious demise of Silicon Valley Bank and other institutions. Were these crashes due to bank mismanagement, as many pundits as well as regulators have posited? Were they due to not managing risk, not hedging, and unfettered exposure to sectors of concern? Or maybe something else is afoot, a movement that may have begun a decade ago.
Recall the Great Recession (2008–10), buoyed by a housing and mortgage crisis created by imprudent lending practices, and then the music stopped. In its inimitable wisdom, the government came in legislatively and regulatorily, via Dodd-Frank, crafting what they thought was a belt-and-suspenders approach to avoiding another debacle.
Certain banks were redefined as systematically important financial institutions (SIFI), to be protected at all costs, while establishing a guided risk regimen. Whether due to the additional compliance costs of Dodd-Frank or demographic changes in the market or the need for better economies of scale, we witnessed a consolidation of smaller banks, reducing the gross number from 7,700 to 4,200 over the subsequent ten years.
The US banking system—with its diversity of institutions, from money centers to community banks, harboring in urban and rural settings—is unique on the world stage. We have vastly more banks than any other country, both by design and opportunity. This has contributed to entrepreneurship through local lending, supporting farming communities, and a general competitive economy.
The increasingly reductive nature of this industry doesn’t appear to be just another macroshakeout. Silicon Valley Bank (SVB) was a well-run institution, yet within days, it went from hero to zero. CEO Greg Becker and his team were accused of mismanagement, including being accused of precipitously monetizing stock options.
Hopefully, a little perspective will be insightful.
SVB, like most US banks, has seen over the last twenty years a consistent reduction in relative lending activity, as measured by loan-to-deposit ratios. Decades ago, the typical bank targeted a ratio of 80 to 90 percent; the spread between interest collected on loans and interest paid on deposits was the core bank revenue model. To manage lending and overall balance sheet levels, the regulators would toggle the “reserve requirement“—namely, the amount of on-hand cash that would be needed to address deposit withdrawals.
To stimulate the economy with new lending, the regulators gradually reduced the reserve requirement to zilch, nada, zero, meaning that the banks no longer had to maintain a level of ready cash for withdrawals. Now consider that with the proliferation of nonbank lenders, the current loan-to-deposit ratio sits at roughly 62 percent nationwide. With no cash requirement, the banks (including SVB) have built extensive securities portfolios, largely gilts (treasury- and government-guaranteed mortgage securities). Reallocating the asset side of their balance sheets into purportedly risk-free assets should have been considered a very conservative portfolio move. In fact, looking at the SVB balance sheet at the time of its takeover, its loan-to-deposit ratio was a mere 43 percent. Most would say, “Good on you.”
Page back to Dodd-Frank and its imposition of stress tests, capitalization levels, and risk assessments. It failed significantly in addressing the changing balance sheet composition of banks, from ledgers dominated by “credit risk assets” (i.e., loans) to the significant inclusion of assets subject to “interest rate risk.” With the recent quantitative tightening (i.e., rising rates), so-called risk-free assets were fixed rate, longer duration investments, which moved inversely with interest rates. As such, the “conservative gilt” portfolios ended up as a financial hara-kiri. By recognizing the current value of the “gilts” given rate moves, such portfolios incurred billions of dollars of losses. And based on the size of such portfolios vis-à-vis overall asset levels, coupled with leveraged banks’ equity, to which the losses are allocated, banks would find themselves either capital-impaired or rendered insolvent.
Simply, Dodd-Frank, in its feigned brilliance in correcting early deficiencies, missed the mark of monitoring “interest rate risk,” now the bane of the current banking environment.
Further, SVB is not alone in its broken-gilt affair. Reviewing call reports of the top two hundred banks in the US, nearly two-thirds find themselves in a comparable position with pro forma capital impairment. In fact, in April 2023, the Federal Reserve Bank of Kansas City reported that as of quarter three of 2022, 722 banks in the US reflected unrealized losses of over 50 percent of their capital. An industry in distress? You betcha.
Banks are highly regulated, compelled to ongoing reporting and subject to strict regulation and legislative tomes like Dodd-Frank. There are a battery of regulatory bodies overseeing them, from the Office of the Comptroller of the Currency to the Federal Reserve Bank, the Department of the Treasury, the Consumer Financial Protection Bureau, the Federal Financial Institutions Examination Council, and others. Yet, disturbingly, in their collective wisdom, they did not see the confluence of balance sheet composition, high leverage, and no reserve requirement in the wake of the rapid Federal Reserve rate hikes. Couple this with the rising risk in loan portfolios, particularly commercial real estate and consumer portfolios, and it’s powder keg time.
These are not “aha” observations. Banks report, and the regulators have a fiduciary responsibility to monitor and manage the space. Portfolio quality and monetary policy should not be surprises. Events are dynamic. Yet, one wonders whether the industry status is the result of regulator ignorance bordering on insanity, or might this be something orchestrated with intent?
Recall the Bidenette nominee for the Office of the Comptroller of the Currency, banking’s primary regulator, Saule Omarova. She had some unique views on how the economy and the banking system should run and authored an intriguing paper entitled “The People’s Ledger: How to Democratize Money and Finance the Economy.” Simply, her proposition involved moving all customer deposits held at our four thousand plus banks to be redeposited onto the Fed’s balance sheet, where everyone would hold their account.
It would then become easier for the government to “drop in” helicopter money and facilitate payments. And with banks no longer holding deposits, such would tap into the Fed, borrowing funds so to make loans to their respective borrowers, all in the spirit of efficiency and targeting funds into the economy where needed.
Panacea?
Consider, also referenced in the paper, how the Fed would have the ability to drop money into accounts directly. Alternatively, it could remove money from accounts if the Fed and the govvies believe that there are inflationary pressures and there’s a need to restrict the money supply. On the lending side, due to the “mother, may I” nature of banks borrowing from the Fed to lend to their borrowers, policy makers could weigh in. Industries in favor, like the green industry, would have access to credit, whereas industries out of favor, like fossil fuels, may need to borrow outside the banking system. Ms. Omarova’s People’s Ledger bank could embark on redlining.
In effect, Ms. Omarova’s postulate seems Orwellian—the centralization of the banking spigot under the auspices of efficiency and fairness. Ultimately, she withdrew her nomination as it became clear she would not be confirmed.
But her paper resonates as she envisaged a centralization, consolidating an industry for policy purposes. There are certainly those who subscribe to central control; thus, might not a banking crisis (i.e., reducing bank numbers) allow the People’s Ledger to manifest?
So, do we find a crisis due to exogenous circumstances or thoughtful endogeny? A crisis of neglect or one carefully planned?
Finally, it is noted that the release of FedNow, the Federal Reserve’s payment platform, is scheduled for July 2023, which looks incredibly like the People’s Ledger.
Coincidence?
Coffee the Christian way: Promised Grounds
Article cross-posted from Mises.
Five Things New “Preppers” Forget When Getting Ready for Bad Times Ahead
The preparedness community is growing faster than it has in decades. Even during peak times such as Y2K, the economic downturn of 2008, and Covid, the vast majority of Americans made sure they had plenty of toilet paper but didn’t really stockpile anything else.
Things have changed. There’s a growing anxiety in this presidential election year that has prompted more Americans to get prepared for crazy events in the future. Some of it is being driven by fearmongers, but there are valid concerns with the economy, food supply, pharmaceuticals, the energy grid, and mass rioting that have pushed average Americans into “prepper” mode.
There are degrees of preparedness. One does not have to be a full-blown “doomsday prepper” living off-grid in a secure Montana bunker in order to be ahead of the curve. In many ways, preparedness isn’t about being able to perfectly handle every conceivable situation. It’s about being less dependent on government for as long as possible. Those who have proper “preps” will not be waiting for FEMA to distribute emergency supplies to the desperate masses.
Below are five things people new to preparedness (and sometimes even those with experience) often forget as they get ready. All five are common sense notions that do not rely on doomsday in order to be useful. It may be nice to own a tank during the apocalypse but there’s not much you can do with it until things get really crazy. The recommendations below can have places in the lives of average Americans whether doomsday comes or not.
Note: The information provided by this publication or any related communications is for informational purposes only and should not be considered as financial advice. We do not provide personalized investment, financial, or legal advice.
Secured Wealth
Whether in the bank or held in a retirement account, most Americans feel that their life’s savings is relatively secure. At least they did until the last couple of years when de-banking, geopolitical turmoil, and the threat of Central Bank Digital Currencies reared their ugly heads.
It behooves Americans to diversify their holdings. If there’s a triggering event or series of events that cripple the financial systems or devalue the U.S. Dollar, wealth can evaporate quickly. To hedge against potential turmoil, many Americans are looking in two directions: Crypto and physical precious metals.
There are huge advantages to cryptocurrencies, but there are also inherent risks because “virtual” money can become challenging to spend. Add in the push by central banks and governments to regulate or even replace cryptocurrencies with their own versions they control and the risks amplify. There’s nothing wrong with cryptocurrencies today but things can change rapidly.
As for physical precious metals, many Americans pay cash to keep plenty on hand in their safe. Rolling over or transferring retirement accounts into self-directed IRAs is also a popular option, but there are caveats. It can often take weeks or even months to get the gold and silver shipped if the owner chooses to close their account. This is why Genesis Gold Group stands out. Their relationship with the depositories allows for rapid closure and shipping, often in less than 10 days from the time the account holder makes their move. This can come in handy if things appear to be heading south.
Lots of Potable Water
One of the biggest shocks that hit new preppers is understanding how much potable water they need in order to survive. Experts claim one gallon of water per person per day is necessary. Even the most conservative estimates put it at over half-a-gallon. That means that for a family of four, they’ll need around 120 gallons of water to survive for a month if the taps turn off and the stores empty out.
Being near a fresh water source, whether it’s a river, lake, or well, is a best practice among experienced preppers. It’s necessary to have a water filter as well, even if the taps are still working. Many refuse to drink tap water even when there is no emergency. Berkey was our previous favorite but they’re under attack from regulators so the Alexapure systems are solid replacements.
For those in the city or away from fresh water sources, storage is the best option. This can be challenging because proper water storage containers take up a lot of room and are difficult to move if the need arises. For “bug in” situations, having a larger container that stores hundreds or even thousands of gallons is better than stacking 1-5 gallon containers. Unfortunately, they won’t be easily transportable and they can cost a lot to install.
Water is critical. If chaos erupts and water infrastructure is compromised, having a large backup supply can be lifesaving.
Pharmaceuticals and Medical Supplies
There are multiple threats specific to the medical supply chain. With Chinese and Indian imports accounting for over 90% of pharmaceutical ingredients in the United States, deteriorating relations could make it impossible to get the medicines and antibiotics many of us need.
Stocking up many prescription medications can be hard. Doctors generally do not like to prescribe large batches of drugs even if they are shelf-stable for extended periods of time. It is a best practice to ask your doctor if they can prescribe a larger amount. Today, some are sympathetic to concerns about pharmacies running out or becoming inaccessible. Tell them your concerns. It’s worth a shot. The worst they can do is say no.
If your doctor is unwilling to help you stock up on medicines, then Jase Medical is a good alternative. Through telehealth, they can prescribe daily meds or antibiotics that are shipped to your door. As proponents of medical freedom, they empathize with those who want to have enough medical supplies on hand in case things go wrong.
Energy Sources
The vast majority of Americans are locked into the grid. This has proven to be a massive liability when the grid goes down. Unfortunately, there are no inexpensive remedies.
Those living off-grid had to either spend a lot of money or effort (or both) to get their alternative energy sources like solar set up. For those who do not want to go so far, it’s still a best practice to have backup power sources. Diesel generators and portable solar panels are the two most popular, and while they’re not inexpensive they are not out of reach of most Americans who are concerned about being without power for extended periods of time.
Natural gas is another necessity for many, but that’s far more challenging to replace. Having alternatives for heating and cooking that can be powered if gas and electric grids go down is important. Have a backup for items that require power such as manual can openers. If you’re stuck eating canned foods for a while and all you have is an electric opener, you’ll have problems.
Don’t Forget the Protein
When most think about “prepping,” they think about their food supply. More Americans are turning to gardening and homesteading as ways to produce their own food. Others are working with local farmers and ranchers to purchase directly from the sources. This is a good idea whether doomsday comes or not, but it’s particularly important if the food supply chain is broken.
Most grocery stores have about one to two weeks worth of food, as do most American households. Grocers rely heavily on truckers to receive their ongoing shipments. In a crisis, the current process can fail. It behooves Americans for multiple reasons to localize their food purchases as much as possible.
Long-term storage is another popular option. Canned foods, MREs, and freeze dried meals are selling out quickly even as prices rise. But one component that is conspicuously absent in shelf-stable food is high-quality protein. Most survival food companies offer low quality “protein buckets” or cans of meat, but they are often barely edible.
Prepper All-Naturals offers premium cuts of steak that have been cooked sous vide and freeze dried to give them a 25-year shelf life. They offer Ribeye, NY Strip, and Tenderloin among others.
Having buckets of beans and rice is a good start, but keeping a solid supply of high-quality protein isn’t just healthier. It can help a family maintain normalcy through crises.
Prepare Without Fear
With all the challenges we face as Americans today, it can be emotionally draining. Citizens are scared and there’s nothing irrational about their concerns. Being prepared and making lifestyle changes to secure necessities can go a long way toward overcoming the fears that plague us. We should hope and pray for the best but prepare for the worst. And if the worst does come, then knowing we did what we could to be ready for it will help us face those challenges with confidence.
