Are American Banks on the Verge of Collapse?

According to reports, Nouriel Roubin, a well-known economist who is opposed to cryptocurrencies, interrupted in a recent MarketWatch column that most American banks are technically close to bankruptcy, and hundreds of American banks have become completely insolvent in terms of capital quality, Rising inflation reduces the true value of bank liabilities (deposits) by increasing banks’ “deposit franchises” (assets that are not on their balance sheets). The experience of U.S. regional banks such as Silicon Valley Bank shows that deposit stickiness cannot be guaranteed. When banks sell securities to meet withdrawal needs, unrealized securities losses become reality, leading to bankruptcy. （cryptoglobe）

“Dr. Doomsday” Nouriel Roubini: Most American banks are technically close to bankruptcy

The recent claim by economist Nouriel Roubini that most American banks are technically close to bankruptcy has alarmed the financial industry. According to Roubini, hundreds of American banks have already become completely insolvent in terms of capital quality. This worrying trend is driven by rising inflation, which reduces the true value of bank liabilities, including deposits. As a result, banks are faced with increasing pressure to maintain their “deposit franchises” – assets that are not included on their balance sheets.

The Role of Rising Inflation in Bankruptcies

As inflation rates continue to rise, the value of bank liabilities, including deposits, decreases. This increase in inflation puts pressure on banks to maintain their deposit franchises to remain viable. Roubini claims that because deposit stickiness cannot be guaranteed, banks may need to sell securities to meet withdrawal needs. When they sell these securities, any unrealized securities losses can become a reality, leading to bankruptcy.

Evidence from Regional Banks

The experience of U.S. regional banks, like Silicon Valley Bank, shows that even smaller banks are not immune to these issues. Depositors can be finicky and withdraw funds even from smaller banks. When regional banks face increased liquidity needs, they may sell securities to meet them, leading to losses that can cause bankruptcy.

The Connection to Cryptocurrencies

As cryptocurrencies continue to gain momentum and evolve, the potential for them to disrupt the traditional banking industry is becoming more apparent. Cryptocurrencies offer a decentralized, peer-to-peer payment system that removes the need for traditional banking structures. Additionally, the value of cryptocurrencies is not dependent on inflation, making them an attractive alternative to traditional currencies.

Conclusion

The current state of American banks is concerning, with rising inflation and the potential for deposit stickiness causing increasing pressure on banks to maintain their deposit franchises. While cryptocurrencies may not be the solution to this problem, they offer an alternative to traditional banking structures that are increasingly seen as unstable.

FAQs

1. What is deposit stickiness, and why is it a concern for banks?
Deposit stickiness refers to the tendency of depositors to remain with a particular bank. When depositors withdraw funds, it can put pressure on banks to maintain their deposit franchises, which can lead to bankruptcy.
2. How do cryptocurrencies offer an alternative to traditional banking structures?
Cryptocurrencies offer a decentralized, peer-to-peer payment system that bypasses traditional banking structures. Additionally, the value of cryptocurrencies is not dependent on inflation, making them an attractive alternative to traditional currencies.
3. Are regional banks more at risk of bankruptcy than larger banks?
Regional banks are not immune to bankruptcy risks. Depositors can withdraw funds even from smaller banks, and when regional banks face increased liquidity needs, they may sell securities to meet them, leading to losses that can cause bankruptcy.