FDIC slams biggest US banks, says capital reserves “inadequate”

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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