Following the collapse of SVB and Signature Bank, the Treasury took a remarkable step to stabilize the banks. It promised to make all depositors, insured and uninsured, whole. Secretary Yellen testified to Congress on Wednesday that the action was to stabilize the banking system and prevent contagion across the country.
Yellen wavered the Treasury position a few times this week. On Tuesday, she told the American Bankers Association that the government is ready “to provide further guarantees of deposits if the banking crisis worsens.”. On Wednesday, she assured Congress that the banking system is sound and would not insure all depositors of future collapses without Congressional approval. She assured Congress that blanket insurance was not being considered. “I have not considered or discussed anything having to do with blanket insurance or guarantees of all deposits,” said Yellen. Several regional banking stocks fell by double-digits following her comments. First Republic Bank fell by 15.5%. On Thursday, she testified that the Treasury is prepared to take additional actions to stabilize the banks, similar to those taken at SVB and Signature, implying making all depositors whole at future collapses.
Congressional members have accused the Treasury of rewarding risky banking practices and punishing prudent banks for insuring all deposits at SVB and Signature. Around 90% of SVB and Signature deposits were uninsured. Several regional banks suffered mass withdrawals since the SVB, and Signature Banks collapsed and moved funds to "too big to fail" banks. Capital flooded big banks in the last week.
What does it mean?
A reasonable question to ask is whether the banking system is sound or not. Twice this week, the Treasury Secretary stated the Treasury was ready to take emergency action and once said that she hadn't considered emergency action. Please pardon us, Secretary Yellen, but which one is it? Is the banking chaos an emergency or not? As obvious as it sounds, emergency actions should be reserved for emergencies. There are no reasons to mention emergency procedures to calm markets. The point of the FDIC is to have systems in place for when banks collapse, which is always a very urgent situation.
A better statement to calm markets would be something like, "The FDIC is well funded and adequately able to handle challenges that may arise. We are monitoring the situation closely. The numbers are within manageable limits, and we don't feel any emergency actions will be necessary?" A statement like that would calm markets. Instead, she went all in on the extremes. ‘We are prepared to flood the banks with emergency capital and insure everyone. Just kidding. We haven't even thought about emergency actions. Run for the hills. We are ready to take emergency measures.’ Perhaps I have an overactive imagination, but the scene would make more sense if it were Bugs Bunny talking to Yosemite Sam instead of the Treasury Secretary talking to Congress.
It is very unnerving that bank stocks are swinging wildly because the banks must rely on standard FDIC procedures. First, it clearly indicates that the FDIC is not equipped to deal with multiple bank failures . Second, it reveals that the banks are highly overleveraged in risky assets. Third, the banks want a bailout. The idea that no bailout is coming makes investors panic. Please remember that I am not a financial advisor. Still, I will go on a limb and make a definitive statement about the market. The Treasury Secretary is not acting like this is a typical market, and there are serious problems in the banking system.
Some people are moving their cash up the banking food chain to larger banks. Others are moving their cash up the monetary food chain into precious metals. Which makes more sense to you to keep your wealth secure? Would you rather trust a bigger building or better money?
Let’s talk about it.
Call the U.S. Gold Bureau to learn more.