"Fortress" Balance Sheets? FDIC Slams Biggest US Banks, Says Capital Reserves "Inadequate"

Tyler Durden's picture

Submitted by Simon Black via SovereignMan.com,

On Friday morning, a gentleman named Thomas Hoenig wrote some rather unflattering comments about the US banking system in a little known publication called the Wall Street Journal.

In his remarks, Hoenig stated that “while the largest U.S. banks have increased capital since the [2008] crisis, their capital is still lower than the industry average and inadequate for bank resiliency.

Think about what means. A bank’s “capital” is essentially its rainy day reserve fund.

If there’s a giant mess in the financial system and asset prices collapse (as they did in 2008), a bank with plentiful capital will be able to withstand the crisis.

Banks with inadequate capital will fail.

Hoenig is suggesting that many of the largest banks in the US fall in the latter category.

More importantly, Hoenig slammed the ridiculous accounting methods that banks use to report their financial condition, something he said “too easily allows banks to conceal risk.”

So Hoenig is telling us that banks have insufficient capital to be resilient in a crisis and can too easily hide their risks. Crazy.

So who exactly is this whack job Thomas Hoenig? What sort of social deviant would possibly question the sanctity and soundness of the US banking system?

Hoenig is the vice chairman of the FDIC, as well as former president of the Kansas City Federal Reserve Bank.

So, he’s not a whack-job. He’s the ultimate banking insider.

I’ve been writing about this for years, detailing how most Western banks have, at a minimum, questionable levels of capital, and they play all sorts of accounting tricks to mask their financial condition.

But as I often say, don’t take my word for it. Listen to the banks themselves.

Major banks report their numbers every single quarter.

And if you’re a financial wonk like I am, you can tear apart bank balance sheets and see for yourself how dangerously low their levels of liquidity are, and the almost comical ways they’re conveniently hiding huge losses in their bond portfolios.

Well, now you can listen to the #2 executive at the FDIC as well.

One of Hoenig’s major points is that bank accounting methods allow them to live in a pretend world where their assets carry ZERO risk.

For example, prior to the financial crisis, banks were allowed to assign a zero risk rating to all their toxic subprime mortgages.

It didn’t matter that this stuff was worthless. The banks were able to carry all these assets on their balance sheets at 100 cents on the dollar as if it were cash.

It’s not much different today.

Now, instead of holding subprime mortgages and pretending that they’re risk-free, banks are holding subprime government bonds.

They’ve loaned trillions and trillions of dollars of YOUR MONEY to bankrupt governments, in many cases at NEGATIVE interest rates where the bank is almost guaranteed to lose money.

And yet they continue to categorize these assets as “risk free”.

This means they don’t need to have any contingency plans or keep any additional capital in reserve in case of default.

This is an unbelievable level of deceit, and finally the FDIC is calling BS.

To hammer this point, just hours before Hoenig published his editorial, the biggest banks in the US requested a FIVE YEAR extension to comply with the Volker Rule.

The Volker Rule is part of a new regulation that forces banks to sell certain risky assets that have the potential to become toxic again.

This rule was born from the ashes of the 2008 financial crisis, and it was originally supposed to go into effect in 2014.

So they requested a 1-year delay. Then another one. And another one. And now finally a 5-year extension through 2022.

That’s an EIGHT YEAR delay to sell off these high-risk assets that they still own.

Why do they need an eight year delay?

Simple. Because there’s no market for these risky assets. No one else wants to buy them.

If the banks sell today, they’ll lose a fortune… reducing their capital levels even more.

So instead of selling, the banks just keep asking for an extension and pretending that these risky assets are worth full value (i.e. what they paid).

Again, it’s another scam designed to make you think the banks are much safer than they actually are.

Look, I’m not suggesting that your bank is going to collapse tomorrow.

But the reality is that your bank is probably nowhere near as safe as you think it is.

And this matters.

As I’ve written before, most people spend more time arguing about what they’ll eat for dinner tonight than thinking about the financial health of their bank.

A bank is your financial partner. Don’t simply assume that it’s safe just because everyone else does.

Be sure. And if you can’t be, it certainly wouldn’t hurt to reduce your exposure to the bank.

Buy a safe, withdraw some funds, and hold a month’s worth of living expenses in physical cash.

With interest rates at basically zero, there’s almost no downside in doing this.

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Hopeless for Change's picture

Right-click, "add reserves to the banking system", Enter.

Problem solved

knukles's picture

BTW, Louisiana is flooded.  Has Barry declared an Emergency yet?  Federal Aid on it's way?
Wouldn't want him to do a full Bush Retard and not say anything for about 48 hours.

Er ....  wait a sec....  You guys are trying to trick me.  He's really golfing?  No.  He's gotta be reorganizing the neighborhood, no?

I am more equal than others's picture



Barry has yet to pick up the phone to call.  He'll wait till after the 19th hole visit - hopefully they got his playlist and the music and drinks are flowing.  If he was a vote for hope, I wonder what the majority was hoping for? 

RozKo's picture

and then he'll call the Milwaukee police and say how racist they are for shooting that poor boy who could have been his son. 

nibiru's picture

Add reserves in fractional reserve system? Wow, they couldn't even match the little threshold?


Whatever, who cares to pass another stress test, everyone is in deep shit so <keep printing>. I guess there is no surprise why EM markets jump so much (Brazil 66%, Russia 25%, Turkey 8%)


Withdrawn Sanction's picture

"Right-click, "add reserves to the banking system", Enter.  Problem solved"

The banks have to supply an asset of SOME value in exchange for the reserve credit.  And there's the rub.  If it takes giving banks an EIGHT year extension, that's crystal clear evidence the assets they have are not worth the book value they've attached to them.  The banks are waiting (just like the Japanese banks...for 2+ decades) for the assets' prices to recover before unloading them.  Problem is, the people on whom they might unload them are aware of the pigs in that poke.   So the big banks have (once again) painted themselves into a corner and want to fob their losses off on others.  

One solution:  wall off the bad assets in "bad bank" (akin to what Mellon Bank did in the S&L crisis w/its Grant St Bank for example) and let the bad assets run off.  In exchange for that consideration, restore Glass-Steagal, find and punish the executives who approved the dud assets (all the way up the chain) including treble recovery of any bonuses awarded on the dud assets, restore maximum interest rate regulation on loans, remove interest payments on excess reserves, prohibit any derivative exposure in deposit-taking banks, and restore double liability for ALL bank officers (VP level and above) even if the bank is incorporated rather than a partnership (and that obligation is a personal liability of the officers not of the bank or its stockholders).  

The general idea is to align banksters' incentives w/prudential operation of a bank rather than w/reckless gambling that socializes losses when the gambles dont pay off as expected...as they occassionally do (even when, or is it b/c? there is manipulation).  Other variations on a theme are also possible of course, but these unproductive parasites need to be brought to heel.  

RaceToTheBottom's picture

Where do I sign up for the same deal?

Oh and put me down for a set of the presidential cufflinks as well.

HedgeAccordingly's picture

Sounds like a banking market structure problem, they have plenty of money they are not lending. Is this going to go on for 50 years of worrying and stacking more cash that is not circulating?

Withdrawn Sanction's picture

Could be, but Hoenig is not a dummy (tool perhaps, but not a dummy).  As a former Fed board member he's well aware there's about $3 trillion in excess reserves parked at the Fed.  Given that's true, the problem he sees is obviously bigger than $3 trillion....way bigger. Hedge accordingly, indeed.  

itstippy's picture

Indeed.  I suspect that the so-called "excess" reserves - capital held over and above the required reserve levels - are in fact not held in reserve at all.  Money never sleeps, you know.  These excess reserves have probably been posted as collateral and rehypothecated multiple times over in the mysterious (and unregulated) credit dark pools and derivatives markets.

When the next financial crisis hits these excess reserves will be, in the words of Jon Corzine, "vaporized".

Capital reserve requirements were established under Glass Steagall and are hopelessly inadequate in today's global financial environment.  Commercial Banks worked well when cushioned with some reserve requirements because the underlying collateral for the banks' credit assets was physical and repossessable - houses, businesses, automobiles.  Investment banks were on their own, and investors beware.  Now the two are completely intertwined and a crisis in the financial system will bring 'em all down.  

Hohum's picture

Of course the capital reserves are inadequate.  They're banks!

Gold Pedant's picture

Of course the FDIC guarantee isn't insurance. Moral hazard!

ShrNfr's picture

"Buy a safe, withdraw some funds, and hold a month’s worth of living expenses in physical cash." - I suggest US silver dollars myself.

TradingIsLifeBrah's picture
TradingIsLifeBrah (not verified) Aug 15, 2016 4:50 PM

All talk, no action.  

Withdrawn Sanction's picture

Yes, but that doesn't have to apply to YOU.  Take action.

goldandsilverguy's picture

Just as a reminder, Hoenig, while he was a voting member of the FOMC, was the consistent voice against Bernanke's stupid-ass monetary policy.

itstippy's picture

The Fed's balance sheet shows that the banks have $2.25T in excess reserves on deposit.  That's whack - how can they not have enough reserves at that level?



Butifldrm's picture

The problem is the Fed has been bailing out the banks and should not be.  I don't trust the numbers.

Doom Porn Star's picture

Counterfeit FED credits = counterfeit FED reserves.

In a ( monetary ) desert this is refered to as a ( monetary ) mirage.

Withdrawn Sanction's picture

Bank reserves are not the same as bank capital. They're related but not the same.

To a commercial bank (but not the Fed), reserves whether minimum or excess are an asset to the bank just like your checking account or cash holdings are an asset to you.  Capital on the other hand is simply the difference between assets and liabiliities.  When capital is gone (L > A) the firm, any firm, is insolvent and will be obliged by its creditors to seek recapitalization or bankruptcy.  In either case, the current management is dismissed since they're presumed to have caused the insolvency.  

W/r/t reserves (or cash) it is possible for a firm or a bank to be temporarily illiquid (that is, strapped for ready cash) but not be insolvent (its remaining assets are still worth more than its liabiliites and so capital > 0).  Illiquidity is a problem but not necessarily an insurmountable one (it still indicates bad management though).  Insolvency however, means financial death...for any firm.  

Hoenig is telling us these big banks are dead men walking.  Yes, we already knew that, but for someone in his position to say it out loud and in an MSM mouthpiece like the WSJ is a firebell in the night.  Ignore it at your peril.   

Madcow's picture

The banks are fine - so long as they can simply confiscate all their customers' deposits - 



seek's picture

Already baked into the Dodd-Frank reform (ha ha ha) act. All the bail-in mechanisms are in black-letter law.

So of course they're underfunded. Why wouldn't they be? Everything is set up to favor them taking as much risk as possible, because that gets them more money, and if they fuck up, that gets them more money, too!

The Fed is just bitching because their fingers that hold down the ctrl and P keys are starting to get callouses.


Butifldrm's picture

Ray Charles could have saw that! Too bad people have to pay to read the WSJ on time.  One day we are gonna run out of time.  The majority of people haven't a clue.

azusgm's picture

The music's still playing so the banksters gotta keep dancin'.

Kirk2NCC1701's picture

Simon, there's always enough fiat to whitewash the books of the TPTB.

There may not be enough Real Capital (backed by Real, Sellable Assets) for the rest though.

In the Fed they trust.  You pay Cash, or with Credit that's fully backed by Assets.

GreatUncle's picture

The safe actually has an upside at 0% you don't get NIRPED without warning.

bid the soldiers shoot's picture


"We didn't want to go to neg interest rates.  The FDIC made us do it."

Catullus's picture

Banks to FDIC: what are we suppose to hold as capital? The Fed owns half the treasury market.

yogibear's picture

LOL, The best way to rob a bank is to own one.

- William Black.

Yeah, ship funds off shore and bankrupt your banks. Cry for a rescue/bailout.

The Federal Reserve comes with trillions to make you good again. Rinse and repeat!

Peelingtheonion's picture


Do you think the banks really care about capital reserves being inadequate...as long as the "bail-in" option is on the table...they won't give two shits...

gregga777's picture

The banking system IS designed to bring down the whole system. That is the entire premise of their "Heads we win, tails you lose" business model. They could hardly amass the entire world's riches by "picking up pennies in front of a steamroller" by honestly taking deposits and making sound loans.

No, they accumulate massive risks betting on worthless paper and gambling on derivatives of derivatives of bets on snail races. If they win they keep the profits. If they win they get lucrative taxpayer bailouts which they then siphon off in various other sorts of ingenious scams and frauds.

They wisely bribe the political parasites to keep them happy enough to allow them to continue their rackets stealing the wealth of depositors and ordinary citizens.

JailBanksters's picture

The Illusion of the FDIC

It's a Joke. They have 5 Billion in assets, with a Credit Card limit of 100 Billion insuring 5 Trillion Dollars will not be stolen by the Banks.

The FDIC is just another fraudulent scheme to protect against banker fraud. The fact is, as soon as you hand over your money to the bank your an unsecured creditor, your last in line for getting anything.

So for the FDIC to start slamming, well it's a kettle and pot thing.