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Banking Collapse Tsunami could eclipse 2008 Crisis
Lately we have seen articles stating that the banking collapse so far in 2023 has eclipsed the banking collapses in 2008. While it's getting close, my research shows that it has not yet eclipsed 2008 in bank asset value. Perhaps the author had different data sets because the source is usually excellent, but his analysis this time is still accurate despite the data set differences.
So far in 2023 we have seen 4 bank failures with $572.45 billion dollars in assets. In 2008 we saw 26 bank failures with $768 billion in assets. The entire banking crisis of 2008-2012 shaped up to be $1080 billion (or $1.08 Trillion). Considering we are only entering May, the indicators that 2023 could shape up to be the worst year on record and could eclipse the entire banking crisis of 2008 is real.
During the entire crisis of 2008-2012 a whopping 465 banks failed. Lehman Brothers, with assets $639 billion in assets, also failed. But, being an investment firm, it was not guaranteed by the FDIC, and not listed in the banking failure data. But the Lehman Brothers failure in August 2008 is widely considered the pinnacle crisis point in the crisis.
Today's situation is shaping up to be even more serious, but displaying itself differently. Instead of Lehman Brothers failing, we have seen Credit Suisse failure in March 2023. Credit Suisse was the 2nd largest bank in Switzerland and was considered "among a group of 30 banks known as globally systematically important, and a full collapse might have devastated the global financial system" (source).
To make a comparison, Lehman Brothers had $638 billion in assets when it collapsed, Credit Suisse had $1.75 trillion in assets. Rival UBS purchased Credit Suisse for only $3.3 billion raising eyebrows on it's windfall considering the bad debt was covered by the Swiss Government and the Swiss taxpayers.
Putting all of this into perspective, if we look at global banking failures by adding in the recent Credit Suisse failure, we have not only clearly entered into 2008 crisis territory numbers, we have surpassed it. All of this is with a mostly silent media.
Even though we have had only 4 bank failures so far this year in the U.S., 3 of those banks were massive consisting of the 2nd and 3rd largest bank failures in U.S. history only after the 2008 failure of Bear Stearns ($309Billion)
Note: Missing is 4th bank failure, Silvergate, which had $16 billion in assets (source: FDIC)
Seeing all of this should make you nervous. In 2008 we saw large failures followed by many more smaller bank failures thru 2012. This could happen now to according to a recent report titled "Monetary Tightening and U.S. Bank Fragility in 2023: Mark-to-Market Losses and Uninsured Depositor Runs?". The report was a collaboration between multiple top business schools including Stanford, Northwestern and Columbia. The report states that 200 banks could fail like SVB if high interest rates persist and the uninsured depositors continue to leave. Here is the abstract from that report:
We analyze U.S. banks’ asset exposure to a recent rise in the interest rates with implications for financial stability. The U.S. banking system’s market value of assets is $2.2 trillion lower than suggested by their book value of assets accounting for loan portfolios held to maturity. 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%. Most of these asset declines were not hedged by banks with use of interest rate derivatives. We illustrate in a simple model 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. We show that a bank’s survival depends on the market beliefs about the share of uninsured depositors who will withdraw money following a decline in the market value of bank assets. If interest rate increases are small such that the bank’s decline in asset values is relatively small, there is no risk of a run equilibrium. However, for sufficiently high increases in interest rates, we have multiple equilibria in which uninsured depositor run making banks insolvent (i.e., a “bad” run equilibrium) becomes a possibility. Banks with smaller initial capitalization and higher uninsured leverage have a smaller range of beliefs supporting a “good” no run equilibrium, increasing their fragility to uninsured depositor runs. 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 with assets of $300 billion are at a potential risk of impairment, meaning that the mark-to-market value of their remaining assets after these withdrawals will be insufficient to repay all insured deposits. If uninsured deposit withdrawals cause even small fire sales, substantially more banks are at risk. Regions with lower household incomes and large shares of minorities are more exposed to the bank risk. We also show that decline in banks’ asset values eroded the ability of banks to withstand adverse credit events – focusing on commercial real estate loans. Overall, these calculations suggest that recent declines in bank asset values very significantly increased the fragility of the US banking system to uninsured depositor runs.
Meanwhile, the FDIC claims banks are safe, listing only 39 banks that are at risk in 2022. This is in huge contrast to 2012 when 651 banks were listed at risk. But everyone should be skeptical as the FED was recently caught on video not wanting to share the truth with the public about the true state of the economy.
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