Until the 2008 financial crisis erupted and destroyed a number of solid banks, you may have believed along with the majority of other Americans that they were safe institutions. The crisis exposed it as a false hope. Thanks to the toxic assets banks had multiplied, they became insolvent when the losses mounted.

The list of bankrupted important and historical institutions were too many to remember. It included such too big to fail heavyweights as Lehman Brothers, Bear Stearns, Washington Mutual, Merrill Lynch, and Wachovia. In the end they all collapsed or were bought out by other banks in shotgun style weddings orchestrated by the Treasury and Federal Reserve.

The U.S. government has been on a mission ever since then to recreate the smoke and mirrors of financial system stability. The centerpiece of this effort came in the form of the enormous Dodd-Frank Act, officially known as the Wall Street Reform and Consumer Protection Act. Congress passed this in 2010 in an effort to make the banks appear to be safer.

Fast forward to six years later, and you may believe again that the banking system is stable, safe, and sound. New warnings from top financial regulatory officials have set the record straight.

Last month it was the Vice Chairman of the FDIC that insures bank accounts who claimed that the system today “too easily allows banks to conceal risk.” What’s more, he stated that the banking system reserve capital is too “inadequate for bank resiliency.”

At the end of last week, the previous United States Treasury Secretary Lawrence Summers added his voice to critics claiming that the banking reform regulations did not make the banking system in the United States safer.

In his paper, Summers claimed, “To our surprise, we find that financial market information provides little support for the view that major institutions are significantly safer than they were before the crisis and some support for the notion that risks have actually increased.”

There are three reasons that this is the case. The first is that banks have been given repeated deadline extensions on selling off risky assets. The Volker rule stated that they would not be allowed to engage in investment behavior which was risky and did not provide a benefit to their customers.

Banks had a deadline of July 21, 2012 to sell off their risky asset. They could not make that, so they requested deadline extension after extension. Finally they have succeeded in getting the deadline pushed out to 2022, a full ten years after the first one.

The explanation is there is no market at full value for the risky assets. If banks had to sell off these assets today, they would book incredible losses which would drastically reduce their capital levels. Neither the banks nor their concerned regulators want to see that happen.

The second problem you find in the banking system is that the banks’ reserve capital is fantastically insufficient to cover potential losses on their books. This capital is the emergency reserve fund of any bank. Regulators were supposed to ensure that the banks keep more capital. The problem is that the rules include numerous loopholes which allow them to mask their financial condition from you.

A final problem with the banks today is that the bank stress tests that are supposed to guarantee their solidity are only an illusion. The editorial board at Bloomberg has recounted that these stress tests allow for a tiny amount of equity capital of $4 for every $100 of assets. This is supposed to keep markets reassured that the banks will be solvent in a crisis. Their final evaluation was that “these flaws make a passing grade almost meaningless.”

Diversify your assets

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