Bank runs happen when people don’t believe a bank is solvent. It doesn’t matter if the bank is solvent, just whether people think it is. If enough people fear insolvency and try to withdraw their money simultaneously, an otherwise solvent bank will quickly become insolvent. The bank won’t have enough cash to satisfy its depositors.
History has shown that the slightest doubt can provoke a bank run. When a bank run happens at one bank, there tends to be a fear-based contagion of runs on other banks. If depositors feel the bank will be able to return their money, bank runs are not expected or typical. However, people can be fickle.
Several European banks are having severe issues. Credit Suisse is the second-largest bank in Switzerland and one of the largest in Europe. Over the last several days, the stock price has been all over the map. The stock price has fallen about 60% this year. It reached its all-time low, and investors have been betting against their ability to pay their debt through credit default swaps. The fear is that a Credit Suisse liquidity and solvency crisis will come within the next few years.
To settle the market fears, Credit Suisse is buying back $3.03 billion of its debt and putting the famous Savoy Hotel in the Zurich financial district up for sale. Credit Suisse probably won’t become Lehman Brothers, but its problems indicate a vast systemic banking problem.
The chart to the right shows the asset-to-equity ratios of major banks worldwide. The asset-to-equity ratio shows the total of all assets divided by the bank’s market capitalization. A lower number means the bank is more financially robust. A higher number means the bank has a higher risk of default. Credit Suisse is in a better position than many other European banks and the three Japanese banking giants, which hold significantly more assets than Credit Suisse. All three Japanese banks are among the 14 largest banks in the world. Credit Suisse is the 45th largest bank in the world. Adjusted for inflation, Credit Suisse is comparable in size to Lehman Brothers when it collapsed. A collapse of Credit Suisse would be detrimental to world markets. Still, there are more significant problems in the banking system than in Credit Suisse. Six of the 20 largest global banks are more likely to default than Credit Suisse.
American and Chinese banks have healthier balance sheets than Europe and Japan. Is there any reason to think American banks may develop liquidity issues? Yes, but not immediately. However, there are 2.4 trillion reasons to think foreseeable problems are on the horizon. There is a record $2.4T and rapidly growing in the reverse repo market.
To see the possible American banking liquidity requires some speculation and logic. The scenario could play out as follows. Inflation will linger at high numbers; banks will continue to try to get cash off their books as quickly as possible. Banks are trading cash for the Treasuries the Fed is selling off their balance sheet. Like always, the Fed will overcorrect and push interest rates too fast. The downturn in the economy will be massive. Many businesses will close. Commercial real estate will become a crisis because the banks will stop receiving the rents on empty buildings. There will be an overflow into the residential sector because of all the job losses. Since banks will be sitting in Treasuries, there won't be enough cash for depositors. Bing, boom, bang, we are looking at a liquidity crisis dwarfing 2008 by several trillion dollars because banks didn’t want to hold cash during a high inflationary period. *
Some banks will become insolvent. People will panic. There will be a run on the banks. People not getting their money will revolt and cause chaos in the streets. It could be a problem that only lasts a few days, but the ripple through society will be felt for decades.
*(Side note: If banks don’t hold cash during high inflation, why should you? It may be wise to put your excess cash into gold and wait for the dust to settle)
What Can You Do to Prepare?
Let’s hope we never see another bank run and the associated financial chaos. Some people will say that hoping for the best is enough. Hope is not a strategy. Hope is the byproduct of having a strategy. Successful investors have a plan. They diversify their portfolios across different asset classes and manage their cash well. Most investment advisors recommend holding 5-20% of assets in tangible assets like precious metals. So much of our lives has become digital, the opposite of tangible. A power outage or internet interruption can easily separate you from your bank account. If you want to be prepared if you cannot access your money or if money becomes worthless, why not create a plan? Have you considered holding tangible physical precious metals as an insurance policy? If not, why not?
The experts at the U.S. Gold Bureau will help you.