04
Dec
What Happens When the Big Banks Go Bust?
A recent article on ZeroHedge discusses the current state of the global financial system, particularly the concerns about the stability of major financial institutions and central banks. The article ponders the precarious situation of banks like Credit Suisse and UBS, raising questions about who will bail out these central banks if they fail.
The writer argues that cutting interest rates, as done in 2009, could lead to a crash of the U.S. dollar. He explains that the fast increase in interest rates from 0% to 5% has so far prevented a dollar crash, but further rate cuts could be disastrous. He also discusses the concept of paying back debts with "confetti dollars," which he suggests would have no real purchasing power and could lead to a significant credit event. This situation could result in the world shunning U.S. dollars and Treasury bonds, effectively shutting down credit markets, as everything in the financial markets and the real economy runs on credit.
The article also points out the potential impact of silver prices, suggesting that if silver rises uncontrollably, it could trigger significant changes in the gold market as well, offering yet another reminder why wise investors are moving a portion of their savings and investment dollars into precious metals.
In March 2023, a series of bank failures in the United States triggered concerns about broader financial stability and the health of larger banking institutions, giving us a small taste of what could be in store if it happened on an even larger scale.
1. Bank Failures in 2023: Over five days in March 2023, three small-to-midsize U.S. banks, including Silicon Valley Bank (SVB), Silvergate Bank, and Signature Bank, failed. This led to a sharp decline in global bank stock prices. SVB's failure was particularly notable as it was triggered by a bank run after the bank sold its Treasury bond portfolio at a significant loss, raising questions about its liquidity. These failures occurred amidst concerns about cryptocurrency market turbulence, as both Silvergate and Signature Bank had substantial exposure to this sector.
2. Regulatory Response: In response to these failures, U.S. federal bank regulators, including the Federal Reserve, announced extraordinary measures to ensure all deposits at Silicon Valley Bank and Signature Bank would be honored. This included establishing the Bank Term Funding Program (BTFP) to offer short-term loans to eligible depository institutions, using qualifying assets as collateral.
3. Global Efforts to Stabilize the Banking System: To prevent contagion and further bank failures, global industry regulators, including central banks from Canada, England, Japan, the European Union, and Switzerland, intervened to provide extraordinary liquidity. This was a clear indication of the perceived risk of a broader banking crisis, and the need for substantial intervention to maintain stability.
4. Impact on Other Banks: The ripple effects of the SVB failure were felt across the banking sector. For instance, First Republic Bank experienced a rapid withdrawal of cash by depositors, leading to a significant reduction in uninsured deposits. Despite receiving a substantial capital infusion, the bank's financial stability continued to deteriorate, eventually leading to its closure and sale to JPMorgan Chase.
These recent events in the banking sector underscore the vulnerability of even larger financial institutions and the interconnected nature of global finance. They also reinforce the concerns raised in the original article about the risks of bank failures and the potential impact on the broader economy, including the precious metals market. This context adds to the narrative that precious metals like gold and silver might become more attractive as safe-haven assets amidst uncertainties in the banking sector and the broader financial system.
The writer argues that cutting interest rates, as done in 2009, could lead to a crash of the U.S. dollar. He explains that the fast increase in interest rates from 0% to 5% has so far prevented a dollar crash, but further rate cuts could be disastrous. He also discusses the concept of paying back debts with "confetti dollars," which he suggests would have no real purchasing power and could lead to a significant credit event. This situation could result in the world shunning U.S. dollars and Treasury bonds, effectively shutting down credit markets, as everything in the financial markets and the real economy runs on credit.
The article also points out the potential impact of silver prices, suggesting that if silver rises uncontrollably, it could trigger significant changes in the gold market as well, offering yet another reminder why wise investors are moving a portion of their savings and investment dollars into precious metals.
In March 2023, a series of bank failures in the United States triggered concerns about broader financial stability and the health of larger banking institutions, giving us a small taste of what could be in store if it happened on an even larger scale.
1. Bank Failures in 2023: Over five days in March 2023, three small-to-midsize U.S. banks, including Silicon Valley Bank (SVB), Silvergate Bank, and Signature Bank, failed. This led to a sharp decline in global bank stock prices. SVB's failure was particularly notable as it was triggered by a bank run after the bank sold its Treasury bond portfolio at a significant loss, raising questions about its liquidity. These failures occurred amidst concerns about cryptocurrency market turbulence, as both Silvergate and Signature Bank had substantial exposure to this sector.
2. Regulatory Response: In response to these failures, U.S. federal bank regulators, including the Federal Reserve, announced extraordinary measures to ensure all deposits at Silicon Valley Bank and Signature Bank would be honored. This included establishing the Bank Term Funding Program (BTFP) to offer short-term loans to eligible depository institutions, using qualifying assets as collateral.
3. Global Efforts to Stabilize the Banking System: To prevent contagion and further bank failures, global industry regulators, including central banks from Canada, England, Japan, the European Union, and Switzerland, intervened to provide extraordinary liquidity. This was a clear indication of the perceived risk of a broader banking crisis, and the need for substantial intervention to maintain stability.
4. Impact on Other Banks: The ripple effects of the SVB failure were felt across the banking sector. For instance, First Republic Bank experienced a rapid withdrawal of cash by depositors, leading to a significant reduction in uninsured deposits. Despite receiving a substantial capital infusion, the bank's financial stability continued to deteriorate, eventually leading to its closure and sale to JPMorgan Chase.
These recent events in the banking sector underscore the vulnerability of even larger financial institutions and the interconnected nature of global finance. They also reinforce the concerns raised in the original article about the risks of bank failures and the potential impact on the broader economy, including the precious metals market. This context adds to the narrative that precious metals like gold and silver might become more attractive as safe-haven assets amidst uncertainties in the banking sector and the broader financial system.
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