by Claudio Grass, Claudio Grass:
In early May, Reuters published a report that truly captured my attention. “European savers are pulling more of their money from banks, looking for a better deal as lenders resist paying up to hold on to deposits some feel they can currently live without,” the article reported. Over in the US, we see a very similar picture. As the FT also recently reported, “big US financial groups Charles Schwab, State Street and M&T suffered almost $60bn in combined bank deposit outflows in the first quarter.”
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Many analyses have attempted to explain this phenomenon dubbed “bank walk”, by pointing to deposit interest rates. They argued that the problem was that while banks were quick to increase their rates for lending to customers once central banks started their “tightening”, they severely lagged in doing so for deposits. So, naturally, customers decided to withdraw their money and look for more lucrative ways to make their cash work for them.
This is, of course, a perfectly reasonable explanation. And in any other time and under any other circumstances, I would have no reason to doubt it or to second guess it. In this case, however, what strikes me as particularly odd, is that so many “experts” and analysts are going hunting for different explanations when there’s a giant elephant in the room that they are totally willing to ignore.
In the space of the past few months alone, we’ve seen a series of serious bank failures, both in the US and in Europe, the likes of which we haven’t seen since 2008. And while the entire establishment and all government institutions tried their absolute best to downplay it, the fact remains that the public is not entirely composed of gullible children. Politicians and central bankers all rushed to reassure us all that this is nothing like 2008, that there’s no risk of contagion and that there’s absolutely no reason to panic. But then again, they offered the exact similar assurances about inflation a year ago. It was going to be “transitory” and everything was under control, remember? Well, as it turns out, a lot of people did remember. That’s why they were quick to run to their banks and get their savings out.
What happens next is the burning question in most investors’ and savers’ minds at the moment. While the political establishment still tries to assuage public fears though the power of denial, unfortunately for them, the cold hard facts paint a very different picture and offer very little reason for hope that the current system can continue humming along or that we can all go back to “business as usual”. As Daniel Lacalle pointed out in a recent article on Mises Wire, “Federal Reserve data shows $98 billion of deposits left the banking system in the week after the Silicon Valley Bank collapse. Most of the money went to money-market funds, as the Bloomberg data shows that assets in this class rose by $121 billion in the same period. The data shows the challenges of the banking system in the middle of a confidence crisis.”
The “bank walk” outflows are bad enough for the banking sector and for the rest of the economy, of course, as shrinking deposits will very likely force smaller and regional banks to reduce lending to families and businesses. However, the worst is yet to come, as Lacalle warned. The real squeeze will come when the inevitable wave of capital destruction hits in the asset base of most lenders. After over a decade of easy money and of over-optimistic and dangerously rosy valuations, for everything from loans to investments, we have now entered a very different, much more sober and cautious phase. As he explains in his analysis, “The optimistic valuations of real estate and corporate investments in banks’ balance sheets will require a significant analysis and subsequent write-off that leads to much tighter credit standards and stringent investment conditions.”
There’s also an even bigger issue at play here that we must keep in mind. The current monetary and financial system is all based on and entirely dependent on the public’s faith in governments and institutions. Fiat money itself would collapse overnight if the people truly, really and practically realized it is completely worthless, backed by nothing and absolutely meaningless without their own belief in it.
The same is true of the banking system. If the public actually realized what the fractional reserve system really entails, what the levels of leverage and exposure of their banks really meant, we wouldn’t simply be talking about a “bank walk” phenomenon right now. It would instantly turn into a fully fledged bank run across the globe. But we don’t even need this realization to reach “critical” mass for a systemic crisis to get triggered. All that is needed is the fear of contagion – and that is already starting to spread.
In April, a Gallup poll conducted in the US showed that 48% of respondents said that they were concerned about their deposits in the bank. Almost 20% indicated they were “very concerned.” The last time Gallup recorded levels of concern like there was in September of 2008. We must also bear in mind that these fears are very well founded and more than adequately justified. According to a recent report by the Hoover Institution, hundreds of US banks are at considerable risk: if half of all uninsured savers withdrew their deposits, 186 American banks would be at a “potential risk of impairment.”
It might take some time to get to this point and it is impossible to predict exactly what might be the trigger for such a mass stampede. However, what we can tell for sure, based on past events, is that when an avalanche like this begins, it unfolds very fast. By the time the panic spreads and the true bank run begins, it will be way too late to act and to protect one’s savings. The time to act is now and the safest of safe havens remain physical precious metals, stored outside the banking system.
