If you are like most people, you do not think about the security of your money at the bank or how safe your bank really is. Bank safety is a concept that is easy to measure and hard to find at most U.S. and Continental European banks.
It simply means that the assets of the bank (its investments and loans) ought to be greater than total deposits. We call this solvency. Banks which are actually solvent boast vastly more assets than they owe their depositors. As investments fail, the bank is well enough capitalized to still pay back the original deposits to the bank depositors.
Liquidity is the related other measurement of safety. It means that banks will have to pay back part of those deposits at some point. Banks need to possess enough cash reserves to cover these requirements. Otherwise they have disastrous issues requiring they force-sell some of their assets to raise necessary cash to cover immediate withdrawal requests. This often precedes a looming solvency crisis.
This is all important because according to data freely available from the Federal Reserve and detailed in the “Assets and Liabilities of Commercial Banks in the United States,” last Friday’s report demonstrated that the trend away from bank safety is not only continuing, it is accelerating. Over the last two and a half years, measurable bank safety been growing progressively worse.
The Federal Reserve’s own data reveals the alarming trend showing the aggregate cash assets of the American banks since the end of 2014 have been continuously decreasing. In those roughly 2.5 years, the cash assets at these financial institutions have declined around 25 percent. The scary part is that the deposits in the same time have grown roughly 15 percent. This Fed data chart shows what has happened:
This means that even as their deposits are rising, banks’ cash is declining. It is the exact opposite of the way responsible and safe banks should be handling their depositors’ money. As a percentage, the total cash to deposit ratio for American banks has decreased by a scary 32 percent since the conclusion of 2014.
While we will likely never know what they are doing with the money, we can say what happens when they make poor choices with it. Consider the recent case of Banco Popular, once among the most important and popular banks in Spain. In recent weeks, the bank was sold to Spanish banking giant Santander for a whopping one euro.
Santander was given 24 hours to look over the toxic loans book of Banco Popular’s $150 billion balance sheet containing literally hundreds of thousands of individual loans. This amount of due diligence did not give Santander a clue what they were purchasing. Now the largest Spanish bank is tied to the worst performing loans of failed Banco Popular and the consequences of the loan book that dragged down what used to be a large, powerful rival.
You should know that Santander has taken enormous risks in this purchase. What’s more, they’ve done so using the deposits of their customers from not only Spain, but also Latin America and the United States. The European governments and international media hailed this pairing as the greatest idea for saving banks in years (since the last “shotgun” mergers in the Global Financial Crisis of 2007-2009).
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These toxic loans and investments made by Banco Popular are not resolved. They have simply been transferred from the books of Banco Popular to Santander. The deadly banking assets now weigh down Santander’s balance sheet. Banco Popular is not at all the only such example of massively troubled banks. The entire Italian banking sector is similarly insolvent.
As the Federal Reserve data just showed, the U.S. banking sector is headed in the same wrong direction. Gold is the proven hedge against major banking problems. It can never become insolvent or make risky loans with your money. Click here today to get your free, no-obligation gold IRA rollover kit from Regal Assets, the industry leader, so that you will have all the information to properly protect your retirement assets with a partial diversification into physical gold.