Banking on Uncertainty: Why 2024’s Bank Risks Could Eclipse the 2008 Crisis

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Source: Bank Failure Risk is 8x Higher than the GFC

Are We on the Edge of a New Financial Crisis? Understanding the Risks Lurking in Today’s Banks

With record unrealized losses nearly eight times greater than those seen before the 2008 Great Financial Crisis (GFC), today’s banking system may be more fragile than most realize. The Federal Deposit Insurance Corporation (FDIC) has flagged 66 banks as “problematic,” raising alarms over the banking sector's resilience in the face of rising interest rates and evolving market demands. The issues underlying this vulnerability reveal structural weaknesses that could have widespread financial consequences. Understanding these dynamics can help investors and depositors protect their assets before another crisis unfolds.

What Are Unrealized Losses, and Why Are They So Dangerous?

Unrealized losses represent declines in asset values that banks haven’t yet sold or “realized.” Today’s significant losses stem primarily from long-term, low-yield assets such as bonds and treasuries purchased when interest rates were at record lows. Now, as interest rates rise, the market value of these assets has dropped sharply, putting banks in a difficult position. Should liquidity demands force banks to sell, they could face staggering losses that may shake the foundation of the financial system.

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Banks Typically Classify Assets Into Two Categories:

1. Held-to-Maturity Assets: These are bonds and other debt securities that banks intend to hold until they reach maturity, avoiding immediate losses. However, if banks are forced to liquidate these assets early, the losses could be severe.
2. Available-for-Sale Assets: These are investments that banks may choose to sell, even though many are currently undervalued. In the event of a liquidity crunch, banks might need to sell these assets at a loss, exacerbating financial pressures.

Current estimates suggest that unrealized losses in these categories are around eight times higher than those before the 2008 crisis. If this financial stress leads to a wave of forced asset sales, banks could face a dangerous cycle of declining asset values and liquidity demands.

Source: FDIC

How 2008 Patterns Are Repeating: What Today’s Conditions Reveal

Historically, banking crises have followed cycles of excessive lending and asset accumulation. In the years leading up to 2008, banks engaged in high-risk investments, primarily in mortgage-backed securities, with few regulatory safeguards. When these assets began to plummet in value, banks were forced into a wave of sell-offs, leading to widespread failures.

Today’s scenario has similar hallmarks. Low interest rates from 2020 to 2021 encouraged banks to amass low-yield government bonds, assuming these would be safe long-term investments. However, rising interest rates have left these bonds deeply devalued, mirroring the risky positions seen in 2008. The FDIC’s recent addition of 66 banks to its “problem list” signals that another cycle of bank instability may be on the horizon.

Rehypothecation: Why Bank Deposits May Not Be as Secure as They Appear

A critical aspect of bank risk today is rehypothecation, a process by which banks repeatedly lend out deposited funds. Here’s how it works and why it poses a risk to the stability of bank deposits:

1. Deposit and Lending Chain: When a depositor places funds in a bank, those funds don’t sit idle. Banks loan these deposits to generate returns. As banks lend, deposits create a cycle of loans, with each dollar being recycled multiple times.
2. Minimal Cash Reserves: This chain of rehypothecation results in only a fraction of actual deposits being held in reserve. If depositors rush to withdraw funds in a crisis, banks will face a liquidity shortfall, as much of the cash has been loaned out.

Rehypothecation underscores the fragility of the banking system. If a significant number of depositors demand their money back simultaneously, banks could quickly deplete their reserves and would be forced to sell off assets, often at a substantial loss. This creates a real risk of a bank run, especially in times of financial instability.

The Federal Reserve’s “Safety Net”: Stabilizing or Postponing the Inevitable?

To curb the risk of another crisis, the Federal Reserve has implemented measures like the Bank Term Funding Program and the Standing Repo Facility. These programs allow banks to exchange devalued assets, like treasury bonds, for cash, often at close to full price. While this provides short-term liquidity, it merely postpones an inevitable reckoning with banks’ unrealized losses.

This intervention comes with consequences, particularly inflation. By providing liquidity for undervalued assets, the Fed essentially stabilizes bank balance sheets without requiring banks to recognize the true value of their losses. As a result, the money supply continues to expand, putting pressure on prices for consumers. By increasing the supply of available funds, the Fed’s interventions risk creating a higher cost of living and diminishing purchasing power for everyone.

The Real Cost of Inflation: Wealth Erosion for the Average Consumer

As banks gain a short-term reprieve, the long-term cost is borne by consumers. Inflation eats away at the value of every dollar, meaning goods and services become more expensive. This hidden tax reduces real wealth and disproportionately impacts those without inflation-protected assets. While banks benefit from the Fed’s support, individuals face a steady erosion of purchasing power.

For investors seeking wealth preservation, inflation-resistant assets offer a vital hedge. Hard assets, such as gold, real estate, and income-generating private investments, retain value better than cash and traditional bank savings. By diversifying into these alternatives, individuals can mitigate inflation’s impact on their portfolios.

Practical Steps to Safeguard Wealth Amid Banking Instability

In light of these risks, investors should carefully examine their financial strategies and consider alternatives to traditional banking. For those with significant cash holdings, alternative investments like gold and real estate provide security outside the risks inherent in today’s banking system.

Here Are Three Practical Steps To Consider:

1. Diversify Into Hard Assets: Gold, real estate, and other tangible assets tend to perform well during inflationary periods. These assets hold intrinsic value and provide a store of wealth when currency-based assets devalue.
2. Evaluate Private Investment Opportunities: Income-producing private assets, such as private equity or multifamily real estate, offer returns not tied to public markets. These investments often deliver stable income, making them less susceptible to the volatility of traditional stock and bond markets.
3. Consider Inflation-Protected Securities: Treasury Inflation-Protected Securities (TIPS) and other inflation-linked investments adjust with inflation, preserving purchasing power. Adding these assets to a portfolio can create a buffer against rising costs.

Watch The Following Video For Full Details:

Why Gold Should Be the Foundation of Your Portfolio

Amid today’s financial instability, gold stands out as a foundational asset for those serious about protecting and preserving wealth. Gold's intrinsic value has historically remained stable through economic booms and busts, making it a cornerstone in diversified portfolios. Unlike paper assets, gold is a tangible store of wealth, immune to the risks associated with securities entitlements and other financial instruments prone to systemic failure. Its stability and reliability make it essential for shielding against inflation, especially when financial markets are vulnerable.

Portfolio Insurance

Gold is an effective form of portfolio insurance, providing a buffer against the volatility of traditional investments like stocks and bonds. Gold often retains or increases in value during market downturns, offsetting losses elsewhere in a portfolio. This characteristic makes Gold an invaluable tool for investors seeking to protect their wealth from the unpredictability of financial markets. Contact New World Precious Metals to discuss purchasing options for physical precious metals.

It Starts With Gold

A Primer on Why Gold is the Foundation for Every Portfolio

I am writing a book about gold with my co-author, Peter J. Merrick, TEP, titled It Starts With Gold. This is not just another book on gold. It is a definitive guide on why gold must be the foundation of any portfolio designed to manage risk, shield against market volatility, and protect from inflation and potential market collapse. Gold is the only asset class that has consistently preserved wealth over time, making it an indispensable asset in today’s uncertain financial climate.

Email me at [email protected] to be the first to receive notice when it is published.

A Partnership for Holistic Wealth Management

For investors looking to de-risk their wealth, partnering with a dedicated wealth management team provides access to sophisticated strategies traditionally reserved for the ultra-affluent. As a dedicated advocate for de-risking business, family and multi-generational wealth, I am partnered with one of Canada's leading independent private wealth management firms. My team serves high-net-worth clients nationwide. We provide professional investment management and comprehensive wealth planning solutions from a fiducially focused, client-first perspective. We provide access to sophisticated tax-advantaged strategies and solutions.

Capital Preservation First

We are driven by a "capital preservation first" philosophy. Our team generates consistent, tax-efficient returns uncorrelated to public markets. By leveraging our expertise, you are granted access to key industry professionals, gaining exclusive entrance into alternative investments such as private equity, private real estate, precious metals, commodities, government-sanctioned flow-through tax-efficient structures, and tax-minimizing corporate insurance solutions offered through mutual life companies. All are designed to fortify, secure and de-risk your family, business and estate assets against financial risk, economic threats, inflation and higher taxes.

To receive a complimentary digital copy of "Who's Investing Your Money?," email me at [email protected] or book a complementary portfolio evaluation with me through my Calendly Link.

Complimentary Portfolio Evaluation

As a valued reader, I am offering you a complimentary portfolio evaluation to discuss how investing in alternative assets such as private equity, private real estate, precious metals, commodities, government-sanctioned flow-through tax-efficient structures, and tax-minimizing corporate insurance solutions can help to fortify and de-risk your portfolio against financial institution risk, economic threats, inflation, and higher taxes. To book your consultation, email me at [email protected] or use my Calendly Link.

The Custodial Model: An Additional Layer of Protection

In light of the revelations in David Rogers Webb's book The Great Taking, to further safeguard wealth, the firms I work with employ a custodial model, where client assets are held securely by an independent third-party custodian rather than commingled with the firm's assets. This crucial segregation of assets provides an additional layer of protection, reducing the risk of seizure or misappropriation in a financial crisis or institutional insolvency. The custodial model offers investors a safeguarded solution to help secure their wealth separately from the investment management firm.

Watch The Great Taking Documentary

Additional Resources:

• The Great Taking PDF
• The Great Taking - Documentary
• The Great Taking Download
• The Great Taking (Audio Book) by David Webb

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Disclaimer

The information provided is for educational purposes only and does not constitute financial, investment, legal, real estate, estate planning, wealth planning, financial planning, tax planning, insurance, or any other financial-related advice. It should not be viewed as a recommendation to buy, sell, or hold any financial products or assets. All investments, including stocks, bonds, private equity, private real estate, alternative assets, and precious metals, carry inherent risks, including loss of principal. Markets are unpredictable, and past performance does not guarantee future results. Diversification may reduce risk but does not ensure protection against loss. Real estate and precious metals are subject to market volatility, economic conditions, and illiquidity. Alternative investments, such as private equity, private real estate, and private debt, often involve complex legal structures, longer time horizons, and higher risk, requiring careful consideration and professional advice. Insurance, estate planning, wealth planning, real estate, and tax planning decisions, as well as any financial strategies, must be tailored to the unique circumstances, goals, and risk tolerance of each individual. Tax and legal implications vary by person and jurisdiction, and changes in laws can affect outcomes. It is crucial to consult with licensed financial, legal, tax, insurance, real estate, and mortgage professionals before making decisions. Forward-looking predictions are the opinion of the author and do not constitute financial advice. By using this information, you acknowledge it is general in nature and not a substitute for personalized advice, and you agree that the authors and affiliated entities are not liable for any financial losses or consequences from reliance on the content provided.

References:

1. Bank Failure Risk is 8x Higher than the GFC - YouTube. Available at YouTube
2. Federal Deposit Insurance Corporation (FDIC) - Quarterly Banking Profile

Here Are Three Practical Steps To Consider:

#BankingCrisis #FinancialProtection #AlternativeInvestments #WealthManagement #ItStartsWithGold