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Banking System: Will US Banks Freeze Your Cash This Summer?

Banking System freeze
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EDITOR NOTE: There are a number of indicators that risk analysts use to gauge the stability of the banking system. Most investors are not familiar with them, and for reasons that are quite clear: they’re a bit too technical for the layperson. The article you’re about to read, an analysis by Lee Adler, is a thorough interpretation of six of these indicators. The information is complex and assumes you have knowledge of the inner workings of the banking system. Nevertheless, the verdict and banking system indicators are clear: the banking system is much closer to collapse than most people realize. It can take as little as a decline in Treasury prices or commercial real estate to trigger a series of bank collapses; or it can take a much wider unraveling across the entire field of banking operations, most of which are detailed below. The fragility is evident, but more importantly, the timeline is this summer. Unless you want to risk having your deposits frozen in the event of a banking collapse, the best thing for you to do might be to take a good portion of your funds out of the bank and into a private depository after converting it to non-CUSIP gold and silver. The time to hedge is now, for if you miss this window of defensive opportunity, you may have to deal with the dire consequences of your hesitation.

Back in September I wrote about why I was giving up on the banking system indicators. Essentially it boils down to this. Every time there’s a critical problem in the banking system due to banker malfeasance, the Fed steps in to paper it over and reward the criminals.

That’s why we focus on the Fed more than anything else. Regular review of the banking indicators was useful once upon a time. The Fed has rendered them irrelevant. But I promised to keep an eye on them, and it has been 5 months since we last looked. That’s enough time that, if anything material has changed, we need to know about it. So herein is a review, our first since last December.

In this report, I highlight the charts. The charts really speak for themselves.

The bottom line is that the system remains extremely vulnerable to a decline in Treasury prices that is probably coming in the second half. Likewise, the return of optimism in commercial real estate is problematic. The banks are taking no precautions. There’s no sign of recognition of the looming losses.

It means that the entire banking system could be destabilized in the second half of this year. The Fed will have to act, massively. History shows that the Fed won’t act in time to prevent a breach of the system. History also shows that the Fed has the power to ultimately make its actions give the appearance of stabilization, leading to the return of animal spirits.

But I don’t know if it will work yet again, and we can at least expect a significant break first. So I would want to be out of harm’s way at the first sign of trouble in the markets, likely coming this summer. Now here’s a review of the banking indicator charts.

Total Bank Loans Stall

The pandemic related surge in lending has collapsed and total lending activity has gone dead in the water. A 7-year uptrend in loan growth has ended. My guess? The big boys don’t need to borrow money when the Fed is giving them free money every week. All banking indicators in the following charts are as of May 1.

Bank Loans Ex Repo Still Growing

The degree of the deleveraging in the economic lending sphere since May is more visible using a measure that strips out Repo lending. Loans, ex-repo, gyrated in response to pandemic programs, and they have fallen sharply in the last year. But looky, looky! The uptrend remains intact!

Repo Borrowing Collapses

Banks, and particularly Primary Dealers, use repo financing to acquire and carry their bond inventories. They normally borrow most of the purchase price of these securities using repurchase agreements (RPs). RPs are very short term loans backed by the collateral of the purchased securities, mostly Treasuries and Agency MBS.

You can see the correlation between the growth of the banks’ holdings of Treasuries and repo financing on this chart. That broke beginning in January. Banks and dealers don’t need repo when the Fed is cashing them out every week. And they really don’t need repo lately, since the Treasury has been paying down $40-45 billion per week in T-bills. The Treasury redeems those securities and pays back the holders with cash into their accounts. Money money money money everywhere.

Banking System freeze

Where Does Homeless Money Go? Into Reverse Repos At the Fed

When the Treasury pays down T-bills, it takes that paper out of the market and sends cash back to the holders of the paper. They can’t roll it back into T-bills, because there are none to be had. So what do they do? Why, they lend it to the Fed overnight, of course! Gotta show that prudence on their balance sheet. If you can’t hold T-bills, a loan to Fed is even better. In other words. “Gonna do it. Would be prudent!”

Since February 23, the Fed has paid down $533 billion in outstanding T-bills. Some dealers and institutional recipients of that cash stretched out on the curve a bit and bought longer term paper, which helped stabilize the bond market. But as of Friday, May 21, those erstwhile T-bill holders had sent $369 billion of the cash they got from the Treasury, into overnight (same as cash) RRP accounts at the Fed. Apparently they put $164 billion into other securities and the rest into RRP.

On this chart, I’ve put RRP line item (blue) overlaid with an upside-down view of the Treasury’s cash account at the Fed (red). They don’t correspond dollar for dollar, because the Treasury is spending money on other things and receiving revenue at the same time. But the correlation is obvious.

Banking System freezeLoans to Shadow Banks

The Fed tracks a category of bank loans called "Loans to Non Depository Financial Institutions." The Fed defines these loans as “loans to real estate investment trusts, insurance companies, holding companies of other depository institutions, finance companies, mortgage finance companies, factors, federally-sponsored lending agencies, investment banks, banks’ own trust departments, and other non-depository financial intermediaries.”

In other words, shadow banks.

As opposed to repo borrowing, which is backed by the collateral of US Treasury securities, these loans may or may not be collateralized. There’s no sign of a lending slowdown here. Leverage reigns supreme.

Banking System freeze

Other Loans Not Classified AKA Margin, Still Growing!

The Fed defines this line as “loans for purchasing or carrying securities, loans to finance agricultural production, loans to foreign governments and foreign banks, obligations of states and political subdivisions, loans to nonbank depository institutions, unplanned overdrafts, loans not elsewhere classified, and lease financing receivables.”

Banking System freeze

The year to year change briefly went negative, thanks to what economists call “base effects.” The year ago period was the pandemic emergency. But let’s focus on the overall trend. Outside of the wild gyrations around the emergency, the trend is intact. The line is rising almost dead center in the channel. Ah, sweet leverage, as collateral values, mostly stocks, only go up forever (sarcasm).

We can guess that at some point all this leverage will unwind, leading to a very bad outcome. But when? That’s the question.

Original post from The Institutional Risk Analyst

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