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Tags: Trading Strategies

We're Headed for a Second Banking Crisis - Here's What to Do

This expert insight from Shah Gilani originally ran in Total Wealth on September 15, 2023

Start the conversation

Shah GilaniShah Gilani

If you're not worried about the stability or solvency of a lot of American banks, you should be.

New data from the FDIC (Federal Deposit Insurance Corporation) shows that while things may have stabilized since the March banking panic, they are not getting better; they are actually getting worse. FDIC Chairman, Martin Gruenberg, starts off his opening comments on the deposit insurer's second quarter 2023 Quarterly Banking Profile saying, "Despite the period of stress earlier this year, the banking industry continues to be resilient."

However, just two sentences later, he concludes his opening remarks with, "But banks reported tightening net interest margins and funding pressures for a second consecutive quarter."

As is typical for any capital markets or banking regulatory body, or in the case of the FDIC, the organization that is supposed to "insure" or backstop trillions of dollars of customers' bank deposits, the mixed results apparent in the Q2 Profile were sugarcoated wherever possible with upbeat assessments about improving metrics. But there's just not enough lipstick in the FDIC's boudoir to make the ugly banking metrics look pretty.

Of course, that's why I'm here: to tell you how ugly some glossed-over metrics really are, why depositors and investors should be worried, and what to do about it.

The problem isn't "transitory;" it's structural.

Remember when Fed Chairman Jerome Powell, from Q1 through Q3 2021, termed the inflation spike the country was experiencing as "transitory?" It didn't take long - by the end of Q4 2021, in fact - for Chairman Powell to acknowledge that "transitory" was not likely the trajectory of inflation. The same is true for what ails America's banks. If inflation was in fact transitory, the Fed wouldn't have had to raise the fed funds rate from zero to a high, so far, of 5.5%, and banks would be in great shape.

They're not. Because inflation appears to be more structural, i.e., embedded in the economy, to continue to combat inflation, the Fed is going to have to keep raising rates or, at a minimum, keep them "higher for longer." That's worrisome because higher rates embed hard-to-overcome, sometimes impossible, structural issues into banks after years of artificially manipulated low rates.

When interest rates were low, having been manipulated lower for a prolonged period, and finally brushing up against the "zero-bound" in the U.S. - while they were actually negative in Europe and other areas due to the plague of Covid-19 - banks were flush with deposits from customers and corporations who had no use for their money for a considerable time.

Banks turned those trillions of dollars of "liabilities" (deposits are liabilities because they can leave) into "assets" by buying lower and lower-yielding U.S. Treasury securities and mortgage-backed securities. And because the yields, or interest offered, on instruments like Treasuries were so low, banks opted for extra yield by leveraging their holdings and buying longer-dated bonds with incrementally more yield.

With "transitory" inflation turning structural and rates getting raised relentlessly, banks now face a frightening new…

 

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Claim My Free Report

Shah GilaniShah Gilani

About the Author

Browse Shah's articles |

Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.

The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.

Shah founded a second hedge fund in 1999, which he ran until 2003.

Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.

Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.

Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.

… Read full bio


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