The silent run

An update on state of the U.S. banking system

From Tuomas Malinen’s Forecasting Newsletter.

Issues discussed:

• The U.S. is in the grips of a ‘silent bank run’ masked by the Federal Reserve.

• Asset purchase (QE) programs of the Fed have made the U.S. banking system fragile.

• The risk of the silent bank run escalating into a “visible one” grows each passing day.

The problems in the U.S. banking system have been under my watchful eye since 24 February. In that entry I warned that the “The U.S. banking sector is more fragile than previously thought“. My warning was based on a worrying decline (basically a crash) in the share of Tier 1 capital to risk-weighted assets in U.S. banks, which implied that the U.S. banks were less well capitalized than previously thought, and thus more prone to a failure.

I naturally had no idea that just three weeks later, the U.S. banking system would become under an existential run saved only by exceptional actions by U.S. authorities (see our special issue, my latest or my lectures on the crisis). Yet, on 10-12 March, there we were. On the brink.

In this entry, I will continue to map the situation in the U.S. banking system ahead of new publications on the safest and the most risky U.S. banks in GnS Economics Newsletter. My analysis reveals that the banking crisis has just been pushed ‘under the surface’, once again, by the actions of the Federal Reserve.

However, the crisis will, most likely, resurface during the coming months. Alas, the U.S. banking system keeps heading into deep waters.

The silent bank run