Are All Banks Insolvent? Economist’s Startling Claim Raises Concerns

By Doug Young – 03 May 2024

Introduction

In a recent declaration that has sent shockwaves through the financial world, an economist has raised the question of whether every bank in the world is currently insolvent. While this claim may seem extraordinary, a closer examination of the evidence suggests that there might be some truth to it.

This article delves into the fundamental problems plaguing the US banking system, the impact of rising interest rates, central banks’ losses, and the growing interest in precious metals amid the uncertainty.

The Fragility of US Banks

The US banking system is facing a significant problem – it heavily relies on debt funding.

According to Professor Tomasz Piskorski from Columbia Business School, the average bank in the US, regardless of its size, is about 90% debt-funded. This means that even a modest decline in the value of bank assets can push a financial institution into technical insolvency.

When depositors start to panic and demand their money, as witnessed last year, this technical insolvency can quickly turn into actual insolvency.

Impact of Rising Interest Rates

The benchmark federal funds rate, at its highest level in 23 years, has had a profound impact on the banking sector.

Economist Lynette Zang warns that the rising interest rates have adversely affected massive portfolios of government bonds, as well as portfolios of commercial and consumer debt. This situation has led her to a worrisome conclusion – all banks, including central banks and commercial banks, are insolvent.

It is not just about commercial real estate debt; it encompasses all debt, from bonds to mortgages, auto loans, student loans, credit cards, and trillions of derivative bets against that debt.

Central Banks’ Losses and Uncertainty

Even central banks have not been immune to the consequences of their rate policies. The Federal Reserve (the Fed) suffered its worst operating loss in history last year, amounting to $114.3 billion. Additionally, the unrealized losses on the Fed’s asset portfolio reached a staggering $1.3 trillion.

The entire banking system has amassed over $1.5 trillion in unrealized rate-related losses on its fixed-rate securities and loan investments. This has wiped out more than 70% of the loss-absorbing capacity of the banking system’s primary funding source, tier one capital.

The uncertainty plaguing the financial system is a significant factor driving interest in precious metals.

Precious Metals as a Safe Haven

Amid the growing concerns about the banking system’s instability and the global economy, investors and central banks are increasingly turning to precious metals as a store of value. In the last six weeks alone, gold has seen a 15% increase in value, while silver has surged by over 20%.

The perception that gold and silver can never become insolvent due to their lack of debt has made them attractive assets in times of uncertainty. Money managers and investors are diversifying their portfolios by increasing their positions in precious metals.

Conclusion

The banking system’s fundamental problems, the impact of rising interest rates, and the uncertainty surrounding the global economy have raised questions about the solvency of banks worldwide.

The heavy reliance on debt funding, coupled with the potential for a decline in asset values, creates a precarious situation for financial institutions.

Central banks have not been spared either, as their own rate policies have resulted in significant losses. In these uncertain times, precious metals have emerged as a safe haven for investors and central banks alike.

The enduring value of gold and silver serves as a testament to their reliability when faced with financial instability.

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