Banking System Fragility Grows at Home and Abroad

July 16, 2024

Banks Fail Stress Tests

To the alarm of economists, several major banks failed the Federal Reserve’s most recent stress tests. Citigroup, Bank of America, Goldman Sachs, and JPMorgan Chase stumbled when it came to meeting their liquidity needs. While each bank had specific failures, their overall performance raises concerns about their preparedness to handle financial turmoil. Economic distress, of which there is no short supply of these days, could spark an industry wide banking crisis. As banks in China teeter on the edge of collapse, the entire global banking system is finding itself in a very fragile position.

The Federal Reserve’s stress test was mandated by Congress as part of post-financial crisis reforms. The results of the failed stress tests have investors worried. They are concerned about the strength of these institutions. The banks performed notably poorly when it came to derivatives. Since derivatives are critical part of the financial system, any mismanagement could total undermine market stability. The 2008 financial crisis, also known as the Global Financial Crisis, was significantly influenced by a collapsing derivative market.

Goldman Sachs stood out for its stress test failure. The Fed said that its staff tries to work with the banks to adjust the test. Commenters noted that if a bank can’t even pass the adjusted test, it must be in poor shape. Goldman continues to have the worst credit performance in its group. The Federal test predicted Goldman would lose $40 billion in a severe economic downturn. Goldman’s own internal stress test predicted higher trading losses than the Fed’s in a theoretical downturn. Their failure may require them to outlay roughly $6 billion to cover potential losses. ²

Meanwhile, regional bank failures have started again. First Foundation bank is crumbling due to its commercial real estate portfolio. Its shares plummeted 24% upon news of an unexpected need to raise a quarter of a billion in capital. First Foundation is just one of many smaller banks that are in jeopardy because of their CRE exposure. ³

Banking Trouble Abroad

The Chinese banking sector is facing a crisis. In just one week, 40 banks disappeared. The Economist said about 3,800 Chinese banks are in jeopardy. The endangered banks’ assets total $6.8 trillion. That’s 13% of the country’s banking system. Experts warn the situation can have severe consequences for the global economy. ⁴

Chinese bank troubles stem from several sources. The leading cause is the deep recession in China’s real estate sector. Over-indebted developers and local governments are failing to repay loans. Property prices have plummeted, and construction has halted.

There is also the issue of hidden debts. Chinese banks offload toxic loans onto management companies to create the illusion of stability. They get the debt off their own books and the loan never gets repaid. Meanwhile, Chinese cities are drowning in debt. Unpaid debts are stalling local economies and weighing down the national one. As China moves into recession, their bank issues will worsen.

“Years of credit-fueled growth has finally run its course, and the result will be lower growth for China and a negative impact on the global economy. Slower growth of the Chinese economy will, in turn, exacerbate their banking problems too,” warns Sina_21st.⁵

What It Could Mean to You

An unstable American banking system undermines a pillar of retirement savings. Banks manage and invest these funds, so instability can lead to reduced returns or losses. Economic uncertainty from banking instability can also negatively impact stock markets. Dropping stock prices erode the value of retirement portfolios. Additionally, bank failures can cause panic withdrawals, further destabilizing financial institutions and deepening crises. This chain reaction threatens the financial security of retirees.

Chinese bank failures could significantly impact the US economy due to global financial interconnectedness and China’s economic size. Instability in Chinese banks could trigger global market volatility, affecting US stocks and bonds and impacting investors and retirement accounts. Chinese bank failures could disrupt US-China trade, causing supply chain issues and higher prices for Chinese goods. The resulting economic slowdown in China could lower demand for US exports, harming export-oriented US businesses and jobs. In addition, financial instability in China could spread, tightening credit conditions and affecting US financial institutions.

Conclusion

At home and abroad, the banking sector appears to be growing more and more unstable. To protect their savings from potential bank failures, Americans are converting their funds into physical precious metals. With no counterparty risk, physical gold and silver in a Gold IRA offer long term security from a banking crisis. To learn more, contact us today at 800-462-0071.