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The Next Banking Crisis Starts Here

Fears of a banking crisis and rolling contagion are making global stock and bond markets extraordinarily volatile – and with good reason.

Another financial meltdown, on par with what we saw in 2008, is looming large on the horizon.

One of two potential triggers could ignite a new banking crisis, a rapid contagion, and a second financial meltdown:

  • One or more of the troubled European countries could default outright.
  • Or a major money center bank could be turned away from the interbank borrowing market by its peers.

The panic resulting from either catalyst could start at any time.

And it would spread like wildfire.

The threat of a banking crisis leading to a meltdown centers on Europe. European banks hold huge amounts of their home sovereign's debt, as well as debt of their Eurozone neighbors.

So when default risk rises for any sovereign in the euro area, every one of the region's banks feels the impact on their balance sheets.

Of course, it may not be immediately reflected in write-downs because many banks hold sovereign bonds in their "held-to-maturity" books, as opposed to accounting for them in their "available-to-trade" books.

Being held to maturity means bonds are accounted for at amortized cost as opposed to being marked-to-market, as they would have to be in the trading book.

This is a double-edged sword for banks. Banks don't have to mark down bonds in the long-hold book unless they become "impaired." But in an uncertain market, fearful investors may hammer a bank's stock because its true exposure to bad debt is unknown.

A less obvious spillover of holding so much sovereign paper is that banks use those sovereign bonds as collateral to borrow from other banks in the short-term funding markets. As the value of sovereign collateral comes into question, it can be haircut (reduced in value as collateral) drastically, or not accepted at all.

Banks right now want solid collateral from the counterparty banks to which they are lending their funds. And since lenders already own huge amounts of sovereign debt, they are starting to turn away distressed sovereign paper as inadequate collateral.

When that happens, banks in need of funding are forced to turn to central banks. And that's where it gets really scary.

Central banks already hold large amounts of sovereign debt on their balance sheets, and now they have to take on even more sovereign debt and government-guaranteed securities as collateral for the loans they're making to distressed banks.

And where do central banks get the money they lend out? They get it from the same sovereign governments whose bonds are distressed in the first place.

That leaves a twofold problem for central banks.

First, if they borrow from distressed sovereigns to lend out to distressed banks holding the same debt, they are simply adding more suspect debt to their own balance sheets. That essentially makes them a leveraged extension of the sovereign country they're supposed to backstop.

The second problem for central banks is that if they print money, they end up devaluing the debt they are holding.

Add to these scenarios the attendant stresses that would accompany any downgrade of underlying sovereigns' creditworthiness and everything gets even more slippery. Not only are debt obligations directly affected, but the downgrades would flow through to other assets held by banks.

Worse, downgrades reduce explicit and implicit government guarantees on all outstanding obligations carrying the backing of the sovereign.

Finally, by virtue of their overly leveraged holdings of bilateral contract derivatives and their unquantifiable exposure to attendant counterparty risk, banks have significant exposure to the already suspect derivatives market.

All of the stresses on sovereigns and their debt obligations flow through to the banks that hold those debts as well as the banks indirectly exposed to rolling contagion effects.

The primary danger we face is not a sovereign default. It's that banks will stop trusting what's really on the balance sheets of their peers and consequently stop lending to one another in the short-term funding market.

If just one money-center bank with significant balance sheet exposure is turned away from the interbank funding market, other banks will clamor for liquidity by hoarding cash and seizing collateral. Consequently, the whole system could falter, freeze and crack.

Market volatility has many fathers, but the big daddy of them all is that worldwide contagion will follow a banking panic.

So be sure to watch volatility to determine if it is rising because of increasing contagion fears. And, if you see a breakdown in any of the interconnected sovereign and bank funding mechanisms I just identified, get out and get out quickly.

Safeguard your investments and tread lightly.

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About the Author

Shah Gilani is the Event Trading Specialist for Money Map Press. He provides specific trading recommendations in Capital Wave Forecast, where he predicts gigantic "waves" of money forming and shows you how to play them for the biggest gains. In Zenith Trading Circle Shah reveals the worst companies in the markets - right from his coveted Bankruptcy Almanac - and how readers can trade them over and over again for huge gains. He also writes our most talked-about publication, Wall Street Insights & Indictments, where he reveals how Wall Street's high-stakes game is really played.

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  1. Christian Kircher | August 26, 2011

    what happens to those who got credits from banks in europe in case of a crush of the global economy.
    If they cannot afford to pay back?

    • Benton H Marder | August 26, 2011


      You get a margin call. If you don't pay up, you get sold out right to the amount you owe.

    • Eduardo Hughes | August 26, 2011

      They don't pay back and creditor bank has to write it down

  2. Robert Langston | August 26, 2011

    I like your well written and informative News Letter

  3. Werner | August 26, 2011

    Very good comment but lopsided in as much as it is talking of Europe only. American sovereign debt is just as suspect and infected as European sovereign debt and the same pattern could apply to big US banks. Not to speak of the private debts which are much more importent in the US than in Europe.
    But serious trouble lies ahead, there is no doubt about it!

  4. fallingman | August 26, 2011

    Excellent analysis. Thanks.

    Yes, this is the threat.

    The interbank lending market is the key. Lehman Part Deux is upon us. They can wriggle. They can squirm. But they can't esacape…that's my bet.

  5. maria de bianchi | August 26, 2011

    so as the trust in the banking system is so low how can one protect one's funds? Do you advise not even to own cash deposited in bank accounts?

  6. Richard Lefcourt | August 26, 2011

    Doesn't it seem like China along with other developing nations and OPEC have sucked the wealth out of the Western world?

  7. bahad?r bas | August 26, 2011

    bank of america citybank you don t wanna know the real truth about them they are allready bankrupt,the system is collapsed this is the truth those debts can not be paid back who hold those expensive toilet papers can use after the big collapse anywhere they want

  8. Stephane Owczarek | August 27, 2011

    Pardon my French and lack of knowledge… concerning a potential breakdown of the bank funding mecanisms, what are the numbers to watch (sites and charts updated minimum on a daily basis ). Can anyone help ? Extremely informative and straight to the point piece of writing. Related story "Abnormal is new normal" brings us down to the matter of ethics. Any system that doesn't address the questions about morality such as good versus evil, right or wrong, virtue or vice, justice or crime, is bound to collapse. I don't know what it is like in the US, but I can imagine. Here, in Europe things are getting pretty ugly.

  9. Gordan Finch | August 27, 2011

    Those Euro currency countries are at risk followed by the reserve currency, that bailed out most of the banks who are still at risk in both but without a hope of further cash injections. The Euro is overvalued and the US dollar is treading water while gold is trying to float, all cannot stave off the markets inteligence.

  10. H Craig Bradley | August 27, 2011


    Too bad all these global bankers and their pet politicans are such fools. By fool, I mean someone who ignors truth. The Book of Proverbs has much to say. In this case, about debt. Proverbs 22:7 says: " The rich rule over the poor and the borrower becomes the lenders slave". This is a timeless warning about taking on too much debt. It is dangerous. No distinction is made between "good debt" and "bad debt", only the level of debt held. Fools either don't know or don't care. There are a great many of them, always has been too. The Book of Proverbs also says: " A fool and his money will soon be parted". Get ready U.S. Taxpayers.

    I find it especially ironic that a black American president, Barack H. Obama, would be so unaware of debt and its relation to slavery. I would have thought he would take all necessary steps to avoid any form of slavery for his constituents, if not himself. Clearly, he has sold out to U.S. BANKERS and the financial sector, and did so early on, I might add.

    • Elaine | August 29, 2011

      Craig, while you are absolutely applauded for scripture based opinions, let us not forget this financial mess is the mess President Obama was handed when he walked into office. Obviously he is not God. By that, I mean only God can fix it and He certainly is. Rome was not built in one day and neither did it fall in a single day. Keep watching and praying without ceasing!!!

      • Elaine | August 29, 2011


        Also, if I might add, President Obama could not have clearly sat under the teachings/preachings of his former Pastor, Jeremiah Wright, absent the revelation of slavery being somehow tide to debt, if such has any relevance.

  11. JOHN FRAME | August 28, 2011

    Appreciate your commentary gentlemen, much appreciated. Was hoping for folks like myself, and there are plenty of folk like me out there, that you would have some option commentary. We folk don't get into spreads and other option strategies. Just plain old calls and puts. So far we look at the stocks being recommended and after some analysis will proceed with a call or if you are advising we steer clear, then we will buy a put, after our own analysis.

  12. YSHING9988-RATING@YAHOO.COM | August 29, 2011

    I just signed u for your Private Briefing service and tried out the My Dashboard link. But the links under the my dashboard are not active. I could not get ot the recommendation, research, charging and action to take. Can you give me more instructions on how to get there. Also you mention a note pad I can keep track of my trades, plans for trading etc. where is that?

  13. Louise Cave | August 30, 2011

    Excellent comments and good questions! My main inquiry is: How do investors who have bought precious metals in the form of bullion coins plan to exchange those coins for daily necessities when a currency collapse occurs? Who will acept them, and at what rate of exchange? What will be the medium for making change on an ounce of gold or silver…worthless dollar bills and tin dimes? I have posed this question several times and received no reply.

  14. Michael | August 30, 2011


    That is a great question! I have been stocking up on basic necessities because what you are asking is a real issue that we all may have to address and I am planning on a fairly long wait for the answers.

  15. adan | September 2, 2011

    People here in mexico and surrounds area try to push goverment to kill system the need more than energy or controling money they would care of them selves with condition of killing and controllng healthcare why they need to own a bank or more with lots of energy solutionsof some methods to kill family objectives.

  16. Elaine Carrington | October 12, 2011

    Please make it very clear to one who is very marignal in understanding but seriously wants to. Would you advise the common average person to have their meager savings in one of the smaller banks, one with less expected exposure? I know the government insures deposits but I cann't see between the lines as to how to protect my hard earned savings. Or maybe that is what you are saying – there is no way? Seems way to risky for all concerned to with draw and hide under the mattress. Your direct advise would be appreciated.

  17. Glenn DICE | October 14, 2011

    Is Evergreen bank in the us or is it an over sea account witch or goverment could not take our money from from them. please respond.

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