October 28, 2014
Region VII, Chile
The killer lurked outside in the rainstorm, his axe still dripping with the blood of his last victim.
Inside, the sorority girls gossiped about their missing sisters who had mysteriously disappeared the week before.
–Stop me when this sounds familiar… it’s the standard plot of hundreds of b-rated horror movies–
Suddenly one of them hears a noise. It’s the killer, lying in wait to chop her up into kibbles n’ bits. The music heightens, and the audience shouts ‘Don’t go out there!’
We all know what’s about to happen. It’s so obvious.
The girl on screen senses that something’s wrong but she goes anyway, by herself, to ‘investigate’ the noise… and ends up face-first into the killer’s blade.
Ugh. It’s unbearable to watch… not necessarily for the cinematic gore, but for the sheer stupidity of the soon-to-be-victim falling into the killer’s trap, completely oblivious of the warning signs.
Yet as insufferable as much of the genre may be, perhaps it’s true that art is a reflection of life. Just look around—the alarm bells are sounding for anyone paying attention.
Entire nations are insolvent, including many of the bedrocks of Western Civilization itself. Many police forces have turned into violent, abusive paramilitaries. And with civil asset forfeiture on the rise once again, bankrupt government agencies are sinking their teeth into taxpayers’ flesh in record amounts.
Then there’s the banking system, another ticking time bomb in many jurisdictions.
Just like a bad horror movie, there’s no real mystery in how this is going to play out, regardless of whether it happens tomorrow or years from now. The information is out there as plain as day.
In Europe, the ECB just wrapped up its asset quality review (AQR) of eurozone banks, so the data is very fresh.
As you can imagine, there’s a lot of carnage. Some of the largest banks in Europe are in major distress.
Italy’s largest bank (Unicredit) is bleeding cash, having lost roughly 14 billion euros last year. Most of the other large banks in Italy, along with Unicredit, are posting serious capital deficits.
In other words, the banks don’t have strong enough balance sheets to be able to repay depositors’ funds and weather a financial storm.
In Ireland it’s even worse, with some banks there (like Ulster Bank) having a non-performing exposure (NPE) up to 40%. This means that a substantial portion of the bank’s loans aren’t paying up.
The situation is similar in Cyprus where, despite having frozen depositors’ funds last March and establishing capital controls for a year, the banking system there is still pitifully capitalized.
Bank of Cyprus has a whopping 45% NPE ratio and lost 2.1 billion euros last year. Other Cypriot banks aren’t doing much better.
Greece, Slovenia, Portugal, etc. All the usual suspects are there, still posting substantial capital deficits. There are even banks in Germany that are in trouble.
This situation isn’t exclusive to Europe. Across the water there are a number of cracks in the system.
Just last Friday, the Office of the Comptroller of the Currency shut down National Republic Bank of Chicago, costing the FDIC insurance fund $111 million.
And there are a number of banks in the US (including Bank of America) that didn’t fare well in the Fed’s recent stress tests.
Of course, these stress tests are a total farce. Banks get to count US Treasuries as ‘risk-free’ assets even under the most adverse scenarios.
Nothing could be further from the truth. It’s a total absurdity to view the greatest debtor that has ever existed in the history of the world as risk-free.
In fact, given that US Treasury yields are well below the rate of inflation, holding these bonds is actually destructive to bank balance sheets.
Whether you realize it or not, you’re taking a significant risk holding US dollars in a poorly capitalized US bank, or holding euros in a poorly capitalized European bank, and these hazards should not be underestimated.
There are places in the world where extremely well capitalized banks are backed by governments with zero net debt. Some of them actually pay a reasonable rate of return, or allow you to hold stronger currencies.
It makes sense to consider these options soon. Why wait until your bank ends up on some list of failed institutions? Why take the chance when there are so many better options out there?
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