If SVB failed because of their investment in US government bonds, how many other banks are at risk? Just how much in unrealized losses are there in the books of banks that made similar investments? Is this situation a direct outgrowth of the Dodd-Frank Act?
Any entity who has purchased long-term government bonds– banks, brokerages, large corporations, state and local governments, foreign institutions, hedge funds, insurance companies– are all sitting on huge losses right now.
To recap, with the Federal Reserve raising interest rates (and they have promised to continue doing so), long term bonds are declining in value dramatically. With that in mind, how many of these entities may be facing bankruptcy? Is this the reason the Treasury Department has come out guaranteeing ALL deposits?
As many people know, the FDIC (Federal Deposit Insurance Corporation) guarantees depositors’ money up to $250,000. So, where do they get the money to do this? From fees that the banks pay to the FDIC.
Currently, the insurance fund has about $128 billion in it. How much unrealized losses are there in the banking system right now? The FDIC estimates that to be around $650 Billion! Of course, not all unrealized losses are the same. Some may be in other kinds of investments that could reverse and become profitable. But, the long term bond market does not appear to have any upside in the near future.
What about the Dodd-Frank Act? Aren’t there “stress tests” that banks must undergo periodically? The answer is yes. How did SVB do?
Simon Black noted:
SVB passed its stress tests with flying colors. It also passed its FDIC examinations, its financial audits, and its state regulatory audits. SVB was also followed by dozens of Wall Street analysts, many of whom had previously issued emphatic BUY ratings on the stock after analyzing its financial statements.
This was despite financial statements that said that SVB’s capital had effectively been wiped out by the unrealized bond losses. Again, how many other banks are teetering on the edge?
Now add this fact into the mix. Where does the FDIC invest their money that is in the insurance fund? In US government bonds, of course! So, the FDIC is incurring huge unrealized losses in their insurance fund. What could possibly go wrong?
Let’s remember this. In this day and age, the pols in Washington ALWAYS lie when faced with a crisis of their own making. On Monday, the man who shakes hands with thin air, told the country, “Americans can have confidence that the banking system is safe.” Why would anybody believe this statement at this point?