**The US Banking System Is Sound?**
The US Banking System Is Sound?
_Authored by Michael Maharrey via SChiffGold.com,_ (https://schiffgold.com/commentaries/the-us-banking-system-is-sound/)
**Treasury Secretary Janet Yellen keeps insisting that the banking system is “sound.”**
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**Is it though? Because it doesn’t look particularly sound.**
In fact, we just witnessed the second-largest US bank failure ever.
Government regulators seized control of First Republic Bank on May 1 and sold the majority of the bank’s operations to JP Morgan Chase. It was the third major bank failure this year and the biggest bank to collapse since the 2008 financial crisis. It was the second-largest bank by assets to fail in US history.
First Republic went under after it revealed $100 billion in deposit losses in the first quarter.
The beleaguered bank has been struggling for a while. It was initially bailed out back in March with $30 billion in deposits from several large banks, including JP Morgan and Wells Fargo. The bank also borrowed heavily from the Federal Reserve’s bank bailout program (https://schiffgold.com/commentaries/federal-reserve-launches-qe-extra-lite-to-bail-out-banks/). First Republic shares tumbled 75% last week before the FDIC stepped in.
While JP Morgan is taking over First Republic’s business, the FDIC will provide “shared-loss agreements.” As the FDIC website explains it (https://www.fdic.gov/resources/resolutions/bank-failures/failed-bank-list/lossshare/index.html), “the FDIC absorbs a portion of the loss on a specified pool of assets sold through the resolution of a failing bank – in effect sharing the loss with the purchaser of the failing bank.”
**If we are to believe the mainstream narrative, the failures of Silicon Valley Bank, Signature Bank and First Republic Bank were isolated events and do not reflect a broader problem in the banking system.** But as we have reported, these bank failures are just the tip of the iceberg (https://schiffgold.com/commentaries/svb-and-signature-bank-were-just-the-tip-of-the-iceberg/). A report by the _Wall Street Journal_ cites a study (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4387676) from Stanford and Columbia Universities that found 186 US banks are in distress.
And as Manuel Garcia Gojon pointed out in an article published by the _Mises Wire_ (https://mises.org/wire/charles-schwab-and-other-big-banks-may-be-secretly-insolvent), it’s not just the small and medium-sized banks. Charles Schwab and other big banks may also be insolvent.
One of the biggest problems facing banks is the rapid devaluation of their bond portfolios.
Banks were incentivized to load up on high-priced, low-yield bonds thinking that the Fed would keep interest rates low forever. As the Fed jacked up interest rates to fight price inflation, it decimated the bond market. (Bond prices and interest rates are inversely correlated. As interest rates rise, bond prices fall.) With interest rates rising so quickly, banks have not been able to adjust their bond holdings. As a result, many banks have become undercapitalized on paper as the value of the bond portfolios shrinks. The banking sector was buried under some $620 billion in unrealized losses (https://www.wsj.com/livecoverage/stock-market-news-today-03-13-2023/card/meet-the-btfp-the-fed-s-2023-crisis-facility-Bn7TsQpropbMiW1Z3kdp) on securities at the end of last year, according to the Federal Deposit Insurance Corp.
As the _Washington Post_ reported (https://www.washingtonpost.com/opinions/2023/03/17/svb-first-republic-bank-credit/), this means banks would face unprecedented losses if they were forced to liquidate their bond portfolios. In fact, that is exactly what doomed Silicon Valley Bank. The plan was to sell the longer-term, lower-interest-rate bonds and reinvest the money into shorter-duration bonds with a higher yield. Instead, the sale dented the bank’s balance sheet and caused worried depositors to pull funds out of the bank.
According to the _Post_, the total capital buffer in the US banking system totals $2.2 trillion. Meanwhile, total unrealized losses in the system based on a pair of academic papers is between $1.7 and $2 trillion.
Gojon explains how the big banks have dealt with this problem
> Many big banks in the United States have substantially increased their use of an accounting technique that allows them to avoid marking certain assets at their current market value, instead using the face value in their balance sheet calculations. This accounting technique consists of announcing that they intend to hold such assets to maturity.”
**In other words, this accounting trick makes the bank look far more solvent than it actuall…