Banks Are Becoming Less Safe... Again

Authored by Simon Black via,

What I’m about to tell you isn’t some wild conspiracy. Or fake news. It’s raw fact, based on publicly available data from the US Federal Reserve.

This data shows a very simple but concerning trend: banks in the United States are becoming less safe. Again.

And they’re doing it on purpose. Again.

Few people ever give much thought to the safety and security of their bank.

After all, banks go out of their way to instill an overwhelming sense of confidence that they’re rock solid.

They spend tons of money on ornate lobbies in giant buildings. They buy the naming rights to football and baseball stadiums.

And hey, they’re insured by the government.

But it turns out that none of these elaborate distractions means anything when it comes to bank safety.

Safety is actually pretty easy to calculate.

Think about the business of banking– it’s simple. Banks take deposits, and then use that money to make loans and various investments.

For a bank, those deposits represent the amount of money they owe to their customers.

So obviously the total value of a bank’s loans and investments (i.e. its assets) should exceed its total deposits.

This is known as solvency. A solvent bank has SUBSTANTIALLY more assets than it owes in deposits.

That way, if a loan or investment goes bad, the bank will still be able to repay its depositors.

The other safety factor is liquidity, which basically means that, eventually the bank is going to have to give some of the money back.

Perhaps a depositor decides to initiate an electronic funds transfer to another bank… or makes a withdrawal at an ATM.

The bank should have sufficient cash on hand to be able to meet these needs.

Banks that lack proper liquidity can rapidly run into catastrophic problems, forcing them to fire sale assets in order to raise cash, which in turns could trigger a solvency crisis.

In both of these scenarios, solvency and liquidity, cash is king.

(Note that “cash” can mean both physical currency sitting in a vault, as well as a bank’s electronic deposits at Federal Reserve and other cash equivalents.)

For solvency, cash is about as risk-free as it gets.

Anything that a bank does with your money is going to carry some level of risk. Buying bonds. Car loans. Student loans. Business loans. Residential mortgages.

These all carry certain risk of default. Cash doesn’t.

So a bank with higher levels of cash will typically have much lower risk to its solvency.

Simultaneously, a bank with a strong cash position is also liquid, and hence more likely to be able to honor its customers’ transactional needs.

Bottom line, a safe, conservative bank maintains high levels of cash, especially relative to the total amount of deposits.

But that’s not happening in the Land of the Free.

The Federal Reserve’s most recent report on “Assets and Liabilities of Commercial Banks in the United States” published last Friday showed a continuing trend in the erosion of bank safety.

This is a weekly report, so there’s tons of data. And the trend goes back now at least 2.5 years.

Since late 2014, for example, Fed data show that total cash assets at US banks has been in steady decline, dropping roughly 25% over that period.

But at the same time, total deposits at the banks has actually increased around 15%.

So you can see the issue: cash is falling while deposits are increasing. This is the OPPOSITE of what a responsible bank should be doing.

A conservative bank seeks to INCREASE or at least MAINTAIN the level of cash it has on hand as a percentage of customer deposits.

Banks in the US have been doing the opposite– decreasing their cash holdings while deposits have been rising.

Proportionally, the aggregate cash-to-deposit ratio in the US has fallen by 32% since late 2014.

That’s a steep drop.

So what exactly have they been doing with that money, i.e. the money they should be holding in cash?

The truth is we’ll never know.

Banking is a giant black box. We are provided scant detail about what these people are actually doing with our money.

Sure, they’re making loans. But what loans? To whom? Are the borrowers creditworthy? Is there valuable, high-quality collateral? Does the interest rate make sense to compensate for the risk?

No one knows. Not even the banks themselves know.

When you have hundreds of billions (or even trillions) of dollars of assets on your books, it’s impossible to really know what you own.

So we’re basically all in the dark.

I’m not telling you this to suggest that there’s some major crisis looming or that you should yank all of your money out of the US banking system.

But it’s important to understand that banks are not as risk-free as they lead on.

This huge drop in the cash-to-deposit ratio is a conscious decision. It doesn’t happen by accident. Banks are choosing to hold less cash, i.e. be less safe.

(And the government which supposedly guarantees it all is itself insolvent to the tune of negative $60+ trillion. But that’s another story.)

Why take the chance? Why keep 100% of everything that you’ve ever earned locked up in a system that is actively making itself less safe…

… not to mention the industry’s uninterrupted history of fleecing its customers?

There are too many other alternatives out there.

You could consider transferring a portion of your savings overseas to a stronger, more conservative bank abroad.

Or you could become your own banker by holding some savings in physical cash in a safe at your home or a non-bank safety deposit box facility.

Cryptocurrency is an option (though you’ll have to stomach the extreme volatility for now).

Or even something as mundane as buying gift cards.

There are countless options to distance yourself from this system if you simply have the willingness to see the big picture.

Do you have a Plan B?


38BWD22 Raffie Tue, 06/13/2017 - 16:16 Permalink

  And people wonder why gold and Bitcoin are becoming more popular.  Also just plain ol' physical CA$H.BTW, it took me almost two hours to change US$ into Euros here in the mid-sized town I am in in Italy.  Banks would not (tried 3), had to go to the Post Office (!), take a number and wait...

In reply to by Raffie

DSCH Tue, 06/13/2017 - 15:51 Permalink

"Banks take deposits, and then use that money to make loans and various investments."Stopped reading after this BS. People need to get it through their head - banks CREATE the money they loan.

CRM114 lasvegaspersona Tue, 06/13/2017 - 19:10 Permalink

Well, no it isn't. There are large numbers of sub-prime borrowers with f#ck-all credibility who get lent shedloads of money.That why we got 2008, and will get 2018.It is total lack of effective Government regulation, and bankers' bonus structures, that allows for the creation of money.Might want to bung in idiotic political philosphies, tyranny of the majority, and greed in there too.

In reply to by lasvegaspersona

DSCH stf Tue, 06/13/2017 - 17:31 Permalink

Wrong.  "Banks extend credit by simply increasing the borrowing customer's current account. That is, banks extend credit by creating money." -Paul Tucker, Deputy Governor of the Bank of England, Speech on 13th December 2007 Sorry your college textbook lied to you. 

In reply to by stf

MEFOBILLS DSCH Tue, 06/13/2017 - 17:40 Permalink

Thanks!  Glad to have company on this subject.Physical Cash and Coins are simply an extension of banker ledger.  We no longer have a money system where "currency" is considered something separate from bank credit.Bank Credit disappears when it pays down principle. of bankmoney and reserves Deletion or extinction of credit money is simply the reverse process of its creation. As any payment from a bank to a nonbank creates bankmoney, any payment from a nonbank to a bank deletes bankmoney.Consider the example of a bank's external nonbank borrower who pays interest and repays principal. In this case, the bankmoney is deleted, in that it is debited from the payer's account at the remitting bank, thus closed out, and not re-credited at the recipient bank. Instead, the recipient bank obtains the amount of interest and principal due from the payer's bank in reserves. The interest payment adds to the earnings account of the recipient bank, which in the end contributes to the bank's equity account. The repaid principal results in closing out, thus deleting, the respective credit claim on the customer. Closing out the liabilities there and the claims here represents a co-operative balance sheet reduction.

In reply to by DSCH

AnimalSpirits MEFOBILLS Tue, 06/13/2017 - 19:39 Permalink

Found another economist calling for sovereign money....Economics Professor Randy Wray answers the questions:What is Money?Why is at accepted?What is the relationship between money & government?What backs up our money?Can the US government run out of money?You may be surprised by the answers!From the first seminar of the "Modern Money and Public Purpose" series at Columbia Law School.

In reply to by MEFOBILLS

MEFOBILLS AnimalSpirits Tue, 06/13/2017 - 20:23 Permalink

Randy Wray is a MMT theorist.   They conflate bank money with it being government - which it obviously isn't.Randy and his cohorts at UMKC are pretty accurate at defining the modern money system (bank credit), however they go off the rails.Here is a comparison of NCT vs MMT.  I've studied both and NCT is the most advanced and accurate, to my mind. nonetheless turns out that MMT - in spite of its claim to stand for a sovereign-currency system - is closer to representing new banking doctrine rather than currency teaching.MMT can and does describe banking operations well, but it makes some fatal mistakes.  Be sure and study NCT also to get a more balanced perspective. 

In reply to by AnimalSpirits

AnimalSpirits MEFOBILLS Tue, 06/13/2017 - 23:54 Permalink

Okay, thanks for the info. I spent an hour listening to him last night and also found his descriptions thorough, but was confused with his description of process of issuing the currency - I'll look at comparing with NCT.What do you think of Paul Hellyer - have you read his proposal on how gov should use BoC to issue currency?                                        "A social contract between the government and people of Canada."In view of the fact that our present banking and financial system is unstable, unsustainable and basically immoral, we the undersigned, on behalf of all Canadians, demand that the federal government use its constitutional power over all matters pertaining to money and banking by forthwith taking the following action to benefit all Canadians

  1. The government of Canada should print fifteen non-transferable, non-convertible, non-redeemable $10 billion nominal value Canada share certificates.
  2. Simultaneously the Justice Department should be asked for a legal opinion as to whether the share certificates qualify as collateral under the Bank of Canada Act. If not, legislation should be introduced to amend the Act to specify their eligibility.
  3. The government should then present the share certificates to the Bank of Canada that would forthwith book the certificates as assets against the liability of the cash created, and deposit $150 billion in the government’s bank accounts. The federal government should immediately transfer $75 billion to the various provinces and territories in amounts proportional to their population, with the understanding that they would help the municipalities, as appropriate, so there would be no need to cut back on essential services, or sell valuable assets.
  4. Amend the Bank Act to reverse the 1991 amendments that eliminated the requirement for the Canadian chartered banks to maintain cash reserves against their deposits and provide the Minister of Finance, or someone acting on his or her behalf, the power to set the level of cash reserves for banks and other deposit taking institutions up to a maximum of 34%, provided the increase, beginning in fiscal year 2016/17 is not less than 5% per annum until the new 34% base has been established in 7 years. This will ensure that there will be no inflation resulting from the government-created money.
  5. Repeat the action prescribed in Sections 1 and 3 for six additional years until bank cash reserves reach 34% of deposits.
  6. In each fiscal year following 2022/23 the amount of GCM spent into circulation will be 34% of the desired increase in monetary expansion for that year, with the remaining 66% to be the prerogative of the chartered banks. N.B.  The great advantage of changing the system over a 7 year period is to allow all levels of government the certainty of a cash flow adequate to complete projects once begun, and to facilitate a smooth transition to the new stable and sustainable system.
  7. The amount of GCM created during the transitional period should exceed prudent budgetary requirements in some cases, so governments at all levels should take advantage of the opportunity to pay off significant amounts of their outstanding debt. It is estimated that the federal government could reduce its net debt by as much as one-third, providing further relief to hard-pressed taxpayers.

  (6. In each fiscal year following 2022/23 the amount of GCM spent into circulation will be 34% of the desired increase in monetary expansion for that year, with the remaining 66% to be the prerogative of the chartered banks. N.B.  Don't understand why the 34/66 split. why make any amount the "prerogative" of the chartered banks? 1. It doesn't guarantee they will spend it for productive use (no assigned vector). 2. Why not have BoC function as a commercial bank also and then redistribute gains as a dividend to citizens?)I find he's not very clear here, perhaps I am misunderstanding...Paul Hellyer:

In reply to by MEFOBILLS

MEFOBILLS DSCH Tue, 06/13/2017 - 17:46 Permalink

Here is the Bank of England whitepaper on how modern money is created.  BOE was the first debt spreading bank, so it is remarkable that they spilled the beans.  They put this paper out to stop the bull shit.How much longer does it take for people to get it into their heads that virtually all of our money supply is bank credit, created upon hypothecation.  This should be common knowledge by now.…

In reply to by DSCH

83_vf_1100_c TePikoElPozo Tue, 06/13/2017 - 16:58 Permalink

The normal kind I imagine. If you are of average intelligence half the people you meet... keep their savings in a bank acct.  History books will one day discuss the golden age when one could grow their savings in a savings acct.  Now you might just as well throw your money at stocks or visit Vegas, or take a chance on digital flavored money or collect shiny yellow metal bits. As big a risk as banks are I really feel for those whose retirement accts are being gambled away by shaky devious hedge funds. Plan for the future but don't 'bank' on it.

In reply to by TePikoElPozo

Dewey Cheatum … Tue, 06/13/2017 - 16:15 Permalink

These banks aren't concerned about their safety. They know they are playing on house money. Citi comes out with 2Q warnings of missing their numbers due to a lack of trading revenue.WTF! how about financing real commerce, as they were so chartered in the first place. So we the taxpayers must backstop trading desks. Remembering the good ole days of Glass-Stegal. TBTF is nearly twice its size as measured by market cap.

Zuhalter Tue, 06/13/2017 - 16:26 Permalink

This is a stupid article. No business should ever sit on a pile of cash, it loses value too quickly and makes you a target for hostile takeovers. CapEx or short term investments is where spare cash goes.So what does a bank do with cash that isnt being lent? Short term investments that offer better ROI with less risk. Credit cards, short term paper, repos, derivatives... the banks know how much and what type of current assets they have despite the author's "chicken little" assessment.

moneybots Tue, 06/13/2017 - 16:39 Permalink

"I’m not telling you this to suggest that there’s some major crisis looming" There IS a major crisis looming. In November 2014, the G20 changed the rules for depositors. Not a G20 country or two, the entire G20. The following month, congress passed a bill that Citi wrote almost verbatim and Jamie Dimon lobbied heavily to be passed. Jamie Dimon and Citi know what is coming.

Chris88 Tue, 06/13/2017 - 17:21 Permalink

Horrible article.  Loans/deposits are a liquidity, not solvency, measure, and this is obviously healthier to have this lower, not higher.  Generally you don't want to see regional and community banks exceeding 85%, below 70% means too much liquidity.  Solvency should be looked at in terms of capitalization, TCE/TA which are averaging 8.5%-9.00% which is very good.  Moreover, banks are largely not making leveraged loans they are doing the first 2x of leveraged only (revolver) and referring the the remaining leverage to BDCs.  The author should retract this piece of garbage.

rex-lacrymarum Chris88 Wed, 06/14/2017 - 15:08 Permalink

Correct. Besides, commercial banks do not have complete discretion over the level of excess reserves deposited at the Fed. QE and new regulations (such as those for MM funds) have resulted in vast swings in a number of Fed balance sheet items on the liability side, and that can at times cause bank reserves to rise or decline on "auto-pilot". 

In reply to by Chris88

Macavity Tue, 06/13/2017 - 18:28 Permalink

The author's understanding of banking is a bit pre-historic, or at least pre-digital.

On a related note, do you think QE simply served to feed new cash collateral requirements for the international, interconnected dividend toilet maelstrom?

QE2XS Tue, 06/13/2017 - 18:40 Permalink

You know that penny of interest you get once a month?   That makes you an investor not a depositor.     I wonder what happens with Investors money if there is a run on the bank?