There is one rule about financial institutions that you can take to the bank (pun intended): “Banks that have an insufficient amount of capital will ultimately fail.”
Thomas Hoenig just wrote an article on August 11th about this subject in the Wall Street Journal. Hoenig is the Vice Chairman of the FDIC and also the Kansas City Federal Reserve Bank former president.
He is an expert on the inner workings of the banks. What he has to say about the major banks in the United States should concern you.
Hoenig stated that “while the largest U.S. banks have increased capital since the  crisis, their capital is still lower than the industry average and inadequate for bank resiliency.”
He is revealing a trouble fact. Many of the biggest American banks have inadequate levels of capital. This matters because the capital of the bank is its reserve fund for rainy days.
Asset prices tank when problems in the financial system appear. This is what happened in 2008.
Banks with sufficient capital are able to survive these difficulties. The ones that do not have enough to go on their hands and knees to the government and hope and pray for a bailout.
Hoenig did not stop with these serious charges. He continued by ridiculing the crazy methods of accounting banks employ as they announce their financial results and health. He said that this permits them to hide their risk with far too much ease.
The FDIC Vice Chairman is warning you that the major banks do not have enough capital to survive problems and are able to conceal their risks. They can do this because of the strange rules that allow them to hold all of their assets without any risk.
As an example, before the financial crisis erupted, banks could hold their subprime mortgages at 100% of their face value. It was like they had cash on hand. When it turned out these assets were worthless, this had devastating effects on their balance sheets.
Even though legislation was passed to prevent this from happening again, the banks have managed to keep many of the troubled assets on their balance sheets by asking for eight years of extensions to the rules that say they have to sell them (the Volcker Rule).
As if this is not bad enough, banks are able to do it still with subprime government bonds. They have taken your money and loaned it out to the tune of trillions of dollars to governments which are basically bankrupt.
Many of these bonds pay negative interest which means the bank will likely lose money on the deal. Yet they are still allowed to call this a risk-free asset. Since it is supposedly without risk, the banks do not have to hold extra capital reserves in case any of them default.
It is a step in the right direction that the Vice Chairman of the FDIC is calling it financial trickery. Yet you should not wait for the government to force the banks to be responsible with your money.
You can insure yourself against big bank failures that affect the stock markets and your retirement accounts. Start simply by putting a portion of your cash or assets into gold. You might even use some of that money sitting in your big bank that is not paying you any interest in any case.
Is your portfolio ready for the next crisis?
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