It’s often said that banking is a confidence game. It takes decades to build people’s trust in a banking system and only a few failures to destroy it. Over the last few months, there have been an increasing number of bank failures. To make matters worse, many of these failures are some of the largest of all time.
Every time a bank fails, it puts more pressure on the system in terms of trust. This lack of trust is warranted when you understand how intertwined these financial institutions are with one another. You can think of the international banking system as a blanket with a loose thread.
Prevent a Meltdown
The goal of regulators is to prevent that thread from unraveling the entire system. To accomplish this task, regulators will take any means necessary including taking tax money and giving it to failing financial institutions. Is this enough to stop the bank failures? Unfortunately, it doesn’t look as if it will work.
A study conducted in March by the Social Science Research Network regarding the stability of banks in the US revealed some startling results. According to the report, there are around 186 more banks at risk of failure this time. The report looked at the main causes of the last failures and then searched for similarities in the other institutions.
Following a String of Major Bank Closings
Three massive closures have rocked the financial world this year. Silicon Valley Bank went from being one of the largest banks in the country to failing in months. The same goes for Signature Bank and First Republic. All of these banks made the mistake of not taking risks seriously due to their influx in liquidity.
Bank Runs Drain Liquidity
These banks became insolvent after clients withdrew billions in funding in hours. In some instances, +$40B was withdrawn in less than 10 hours. This sudden loss of liquidity then makes all of the previously ignored risks become major issues that lack preparation.
Another Bank Looks Shaky
The San Francisco-based PacWest Bancorp is the latest large bank to show signs of failure. The bank saw its share prices plummet after news became public that the bank was looking for a buyer. It’s common for banks to look for a buyer when they are facing insolvency.
The news of the possibility of another bank failure sparked concerns about another bank run. Notably, the bank’s shares have risen slightly since the news first broke but around 20% of their clients have already moved their funds off the bank’s networks. The majority of these funds have been moved to larger more established financial institutions.
What’s Causing All of These Failures Recently
Some key factors have led the banking sector down the dead-end road. The continued merger of government and central banking has resulted in a lax regulatory atmosphere that doesn’t look out for the good of the average person.
Whenever you have a major centralization, there is always going to be a group that receives better options and services than the others. The banking cartel has used its position to secure full control over the global economy. Sadly, these decisions have led to fewer opportunities for the average bank user and more fees.
Some common factors are beginning to come to light following the release of damage reports on multiple banks recently. The reasons range from bad risk management to shrinking reserves and bank runs. Here is what’s causing these banks to go belly up.
Interest Rate Hikes
One of the main factors that have left banks feeling shaky is the FED’s sudden decision to hike interest rates. These hikes wouldn’t seem like they would cause banks a huge headache. However, when you learn that many banks have the majority of their reserves in interest-bearing bonds, it makes more sense.
Banks stacked up on bonds during the pandemic as interest rates were very low to stimulate the economy. The advantage of bonds is they have flexible interest rates that become a great tool when the rates are low. Problems arise when interest rates increase.
The raised interest rate makes the bond seem far less attractive to traders. The lowered demand results in a lower value. Large banks can wait for this lull in bond prices as long as their clients don’t withdraw all at once. It’s the medium and smaller banks that are feeling the squeeze currently as they have to sometimes sell their bonds to ensure liquidity.
Since the bonds are worth much less now than when they were first acquired, the bank’s reserves suddenly lose value. People become aware of the bank’s shakiness when banks begin to shop for buyers. Sadly, there are lots of banks that have their reserves tied up in bonds.
Uninsured Accounts
One could argue the massive amount of uninsured accounts is to blame for the growing number of bank failures. An uninsured account is not FDIC-backed. The FDIC insures certain accounts up to $250,000. This insurance became an option after the loss incurred by Americans during the great depression in the 1920s.
It’s common for a bank to have a mix of uninsured and insured accounts. In a normal scenario, around 20-30% of the account held by a bank would be uninsured. The reports revealed that the banks that failed had around 90% of their funding held in uninsured accounts.
The problem with this approach aside from the lack of protection is the reactiveness of the user. If you had $150,000 in an uninsured account and you heard that the bank was experiencing troubles, you would likely seek to withdraw your funds asap.
This is what happened to the last 3 banks that failed. They all looked great due to their massive liquidity but since there was little to no interest risk management, when their reserves dropped it signaled to bank clients to withdraw to prevent personal losses.
Social Media Makes it Worse
One thing that is different from most bank failures in history is the use of social media. In the early days, it could take a week for people to learn the bank was failing and to withdraw their funds. Even in 2008, it took days for these financial institutions to see their funds drained.
Today bank failures are happening faster than ever. The problem is that social media lets news travel fast and leads to FUD. Banks are becoming hyper-sensitive to any bad news as bank users become more worried on the financial scenario of the market and seek alternatives.
If this trend of hypersensitivity continues, it could reach the point where no regional bank can survive bad news. Even a rumor could lead to bankers removing their funding in hours. This scenario is a new risk that regulators are still attempting to figure out.
People Are Concerned
A recent Gallup poll demonstrates how far confidence in the banking sector has fallen over the last year. The report revealed that 48% of adults in the US have raised stability concerns. This trend could increase as more people grow concerned about the safety of money they have deposited in banks
Can the FED Stop Bank Failures?
People have begun to question the FED’s capabilities to stop bank failures in today’s economic scenario as more banks begin to teeter on the brink of collapse. Also, the debt ceiling is higher than ever. The average person holds more debt than in all time. These factors combined with financial warfare have led people to lose faith.
The FED has recognized the need to act and has stepped up its efforts over the last few weeks. Step one, the FED raised interest rates to try and curb inflation. While this caused bank issues, it’s the FED’s only option to prevent hyperinflation.
Second, the FED has opened a new regulatory group dedicated to forecasting bank health more efficiently. The new group will examine new risk factors such as bond reserves and uninsured accounts. They will also look for other red flags such as rapid growth and a high percentage of uninsured accounts.
Possible Options
The FED still has a lot of options that it can use to try and ensure that the bank failures don’t cause a domino effect. There’s a growing number of lawmakers calling on the president to raise the FDIC limits. Some argue that all bank deposits should be fully insured.
Why Not Fully Insure Everything
There are a lot of reasons why it doesn’t make sense for the government to ensure all bank deposits. For one, the government doesn’t have the funding to accomplish this goal by any means. If there was a total collapse the government would print funding or other methods of providing temporary stimulus. These actions would result in more inflation which could result in hyper inflation.
Additionally, a fully insured banking system would only invite more risk-taking by banks. There are already a multitude of banks that lack the proper risk management systems and personnel to accurately predict failures. Adding another safety net like this would only benefit the bankers who would try and push their profits higher at the expense of their clients.
What about DeFi Banking?
DeFi banking is another option that has been gaining momentum recently. DeFi stands for decentralized finance. It’s a blockchain-powered financial sector. DeFi banks are known for their open nature, high returns, and unique features. Many popular DeFi banking options offer you a way to escape inflation and generate lasting wealth.
What Makes DeFi a Smart Option Today
One of the core reasons why you may want to integrate a DeFi bank into your strategy is the ability to avoid inflation. DeFi banks use blockchain technology to enable the use of advanced inflationary-resistant digital assets. These tokens were designed specifically to store value over time.
Safehaven tokens
Safehaven tokens represent the evolution of stablecoin technology. These tokens borrow aspects from stablecoins in that they leverage reserves to decouple from the volatility of the market. Safehaven tokens improve on this concept through the integration of smart contracts designed to protect vital aspects of the tokens.
Examples of Safehaven Token Protections
There are multiple safehaven tokens in the market currently. Among these projects, META 1 Coin is the most popular. The token remains a pioneer in the safehaven token market. Here are some of the protections that make the project stand out.
Prevent Sudden Dumps
The developers have gone to a great extent to prevent market dumps within the token economy. The META 1 Coin features a cross-referencing asset value requirement. All tokens must meet the asset value for the trade to complete.
There are many advantages to this strategy. For one, it prevents coordinated attacks such as those often conducted by trading firms or hedge funds. Additionally, the network prevents nonhumans from joining which eliminates those who are likely to conduct malicious activities.
The META VAULT
Another feature that makes META 1 Coin a true safehaven token is its DeFi integrations. The network enables anyone to secure a 10% APY on their savings using the high-yield account options. This META VAULT account is open to anyone and can be seamlessly added to your saving strategy.
The META VAULT enables you to integrate it into your strategy with minimal effort thanks to the use of the Onramper portal. The Onramper portal can convert fiat into crypto in minutes. It streamlines the onboarding process and lowers both the technical and financial barriers to DeFi adoption.
Banking – It’s Changing
The banking world is morphing into a new multipolar ecosystem. The rise of independent and online banking has led to the DeFi movement taking flight. The main thing to remember is that you don’t have to sit around and take losses or wait for your bank to fail. You have real options.