Customers with more than $250,000 in deposits are in trouble. Dear Fed, how about a safekeeping bank!?
False and Deceptive Records
On Friday, the Office of the Comptroller of the Currency (OCC) Closed the First National Bank of Lindsay Citing False and Deceptive Records
The First National Bank of Lindsay reopened on Monday as a branch of First Bank & Trust Co. of Duncan.
Depositors of the failed bank automatically became depositors of First Bank & Trust Co., according to the FDIC. The insured deposits assumed by First Bank & Trust Co. will continue to be insured by the FDIC.
The FDIC estimates the failure of First National Bank of Lindsay will cost its Deposit Insurance Fund about $43 million.
The OCC said in a news release it acted after “identifying false and deceptive bank records and other information suggesting fraud that revealed depletion of the bank’s capital.”
The regulatory agency announced it also found that the First National Bank of Lindsay “was in an unsafe or unsound condition to transact business and that the bank’s assets were less than its obligations to its creditors and others.”
The OCC announced it also is referring the matter to the U.S. Department of Justice.
Customers with accounts in excess of $250,000 should contact the FDIC toll-free at 1-866-314-1744 to set up an appointment to discuss their deposits.
The First National Bank of Lindsay is the second bank to fail in the nation this year, federal regulators announced. The last bank failure was Republic First Bank in Philadelphia on April 26. The last failure in Oklahoma — the Freedom State Bank in Freedom — was in 2014.
Over and Over
Over and over again, we keep proving the need for a safekeeping bank.
Q: What is a safekeeping bank?
A: A safekeeping bank is one with 100% reserves on deposits.
Musical Tribute
Contrary to popular myth, 100 percent reserves would not stop lending. Banks don’t lend deposits. Rather loans create deposits.
Fed “Playing With Fire” Take Two
In Fed “Playing With Fire” Take Two, Who Starts the Business Cycle? I discussed the need for a safekeeping bank.
My Six Recommendations
- Separate lending banks from deposit banks
- Eliminate the Fed’s ability to do QE
- Eliminate the Fed’s ability to monetize the debt
- Eliminate Fed’s ability to pay interest on reserves
- Audit the Fed
- Balanced Budget Constitutional Amendment requiring 2/3 vote in both houses to temporarily override
My proposal, and that of Irving Fisher in 1935 was to separate safekeeping (depository) banks from lending banks.
FDIC would be either unneeded or unlimited depending on how one views things because all deposits would be parked at the Fed and 100 percent available on demand.
Caitlin Long, CEO and founder of Custodia Bank, wants to create a deposit only bank and the Fed said on some spurious crypto-related charge.
In a long Twitter thread, Nic Carter discusses the Forced Closure of Silvergate Bank that also wanted to operate a safekeeping bank.
I speculate the Fed does not want competition from a safekeeping bank because it wants to force you at some later date into using its own allegedly safe Central Bank Digital currency.
Is this The Hypothetical Bank of Lindsay or is does it have an address? Is it located in a US city? Is it incorporated in a US state? It would seem to be a critical piece of information, yet it is missing. Or, is this such a large entity that everyone knows where it is located (except me)?
Here is the FDIC closure announcement since you seem skeptical
https://www.fdic.gov/bank-failures/failed-bank-list/first-national-bank-lindsay
How long will we have to wait for Branch Bank Digital Currency (BBDC).
Sauce for goose and gander, eh?
I miss the days when banks printed their own beautiful banknotes.
And you could walk into the branch and exchange the beautiful banknote for an even more beautiful gold coin.
OK. Let’s see a bank with zero deposits make some loans.
The bank with zero deposits would just have to purchase the funds in the wholesale/interbank market. At a rate that is less than it is charging its borrower, it would easily earn a profit if the loan is paid off since it would have very low overhead costs if it did not take deposits.
If banks were separated into lending banks and deposit banks, where would the lending banks get the funds to loan out? Banks loan out deposits. It is true that when a loan is made, a credit is made to the borrowers deposit account. But then the customer withdraws those funds to use for their intended purpose.
1. Banks Do Not lend deposits.
2. Reserves do not play a role in loans
3. Loans create deposits
4. Banks can raise capital through bond offerings
5. Customers withdrawing deposits on demand is precisely why there needs to be 100% reserves
Mike, I was in banking 50 years. I have to respectfully disagree. Banks definitely loan out the funds they receive from deposits.
Yes, they do. But almost all of those deposits were originally created via lending at some point in the past by some bank somewhere.
I doubt almost all deposits were originally created via lending. What about savings from earnings; proceeds from sale of appreciated assets; collection of taxes by public entities? The list goes on.
“Banks definitely loan out the funds they receive from deposits.”
Maybe it’s a matter of how you are conceptualizing this but I have to ask :
How is it that total deposit liabilities greatly exceed total bank reserves?
What does a rainy day in Omaha have to do with the price of tea in China?
Why are you asking about total bank reserves when CFO did not mention reserves?
Are you referring to total deposits and banks reserves within the entire US banking system? Or the deposits and reserves (and loans as the other offsetting assets) of an individual bank and its own audited balance sheet – that CFO is referencing as an actual banker overseeing the making of actual loans?
“Are you referring to total deposits and banks reserves within the entire US banking system?”
Yes.
“Why are you asking about total bank reserves when CFO did not mention reserves?”
Because reserves are what constitutes a bank’s monetary assets. But reserves cannot be lent (to commercial borrowers) nor can they be used to buy things. They are used for inter-bank payments, to supply funds to the TGA (Treasury General Account) corresponding to payments made to the Treasury, and to acquire physical cash to handle customer cash withdrawals. They can be lent to another bank in the Fed Funds Market.
Deposits to a bank supply reserve funds $ for $ but since reserves cannot be lent to non-banks the only way to make a loan is to create a new deposit claim against those funds. Since they cannot be spent the only way to buy something is to create a new deposit claim against them. This is why total deposits are greater than total reserves. A new claim against total reserves has been created without any increase in those reserves.
Do you have any real world examples of this construct?
Credit cards. They are unsecured loans. Using your credit card creates a deposit liability (where it is created depends upon where the merchant banks) and a loan asset for the bank issuing the card.
If one does not want to take Mish’s word on this perhaps the Bank Of England will suffice.
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf
The Bank of England is just like the US Fed. It publishes all kinds of research based upon who’s authoring the study.
Here’s another one from the Bank of England:
https://elischolar.library.yale.edu/cgi/viewcontent.cgi?article=9224&context=ypfs-documents
It literally says “banks end up with higher reserve balances held at the Bank of England as the result of asset purchases. These injections of reserves may make it easier for banks to finance a higher level of liquid assets. Banks gain both new reserves and a corresponding new customer deposit when assets are purchased from non-banks. A higher level of liquid assets could encourage them to extend more new loans than they would otherwise have done.”
AKA – both reserves and customer deposits encourage (but do not require) banks to make new loans. But reserves and deposits DO lead to a change in loans
That’s fine, but it has nothing to do with HOW a loan is extended.
Thanks for the clarification for your conceptualization and semantics of this lending process – here and above.
You explain the HOW – in your words. I and many others here stress the FROM WHERE and WHY. As the BoE bulletin above (and standard monetary policy transmission mechanism theory) show, deposits and reserves from the central bank do matter for loan origination. Some here stress the demand side only (credit-worthy borrowers looking for funds), but as in all markets, supply matters too. And the Fed and the asset-holding citizens provide the supply for loanable funds through their policy and personal portfolio decisions. And more supply of such reserve and deposit funds (and lower ensuing interest rates) WILL directly influence more loan-taking by others which affects the macroeconomy.
We should discuss and argue about WHY the Fed is affecting the macroeconomy through its policies. But I don’t think we should waste time on FROM WHERE the funds arrive because the Fed and depositors DO affect the supply of loanable funds.
I hope that any depositors who don’t get all of their funds back sue the Feds over unequal treatment (vis-a-vis SVB and that ilk).
Good suggestions Mish; but unlikely to happen. In addition, FDIC should be able to handle this bank failure.
Now, how about a story on the cost of hurricanes in the US this year. I have seen estimates of 200 billion plus. How much will be covered by insurance and how much will not be covered.
Parts of NC, TN, GA, FL could take months to recover. How will this affect real estate in the affected areas? How much will insurance rates increase?
I suspect WAY less than 50% is covered by insurance. Especially in Georgia and North Carolina where most of the damage was from flooding which as you know is NOT covered under general insurance. Flood insurance is very expensive and almost impossible to get if you aren’t in a flood plain because private insurance companies don’t write flood insurance and the feds only write it for those in flood zones (not many people know that). So probably everyone there is going to get wiped out or nearly wiped out.
I’ve been reading that coastal waterfront property is very hot right now in Florida. TONS of offers pouring in on properties right on the water. For pennies on the dollar of course but lots of strong hands (flush with cash) looking to make huge profit on those with weak hands (wiped out or nearly wiped out). Same as it ever was.
Correct. WAY less than 50%.
From NBC.
https://www.nbcnews.com/news/amp/rcna173619
“ Only about 2% of residences in the 100 counties hit hardest by Hurricane Helene-related power outages were protected by flood insurance, according to an NBC News analysis of Census Bureau data, PowerOutage.us data and National Flood Insurance Program policy data that the insurance company Neptune Flood collected. ”
“ While many coastal counties have larger shares of residences with flood insurance, coverage in inland counties is rare. Less than 1% of the North Carolina counties hardest hit by Helene were covered — and in South Carolina, it was even less, 0.3%.”
Flood insurance is available outside of high-risk areas. Zone “X” is the flood zone for properties with only a 0.2%-1% annual chance (less than 1 per 100 years) of flooding.
FEMA notes that 40% of the flood claims for federally-insured (NFIP) properties are outside-of the high risk areas, and those would be in Zone X or similar:
https://www.fema.gov/fact-sheet/myths-and-facts-about-flood-insurance-2
“strong hands (flush with cash) looking to make huge profit on those with weak hands (wiped out or nearly wiped out)”
This is the scourge of “disaster capitalism.” Skyrocketing homeowners insurance premiums have been driving coastal real estate toward the wealthy for a while now – the hurricanes are likely helping to expedite the transition. The long-term title holders will be those who can afford to pay for the risk – including the wealthy and corporations.
Texas – flood insurance is available to any property owner in a community that participates in the National Flood Insurance Program (NFIP). If they can’t get insurance, maybe their community/county does not participate in the NFIP. Private flood insurance is expanding as an NFIP alternative, but so far seems to be cherrypicking areas that are the most profitable (i.e., least likely to have claims in non-floodprone communities). Legislation after the 1993 floods required banks to force compliance with flood insurance requirements for properties in their lending portfolio. But still, 5-10% is the typical high water mark (sorry) for NFIP penetration among victims from your average federally declared flood disaster. Properties with flood damage from Helene without insurance: 1) Have no federally backed mortgage to require flood insurance, 2) The property ownership hasn’t changed since 1993 or has been passed down without a mortgage, or 3) Have a mortgage for which the lender has not been enforcing the flood insurance requirement (in which case the lender is likely to be fined and potentially open to legal action by the owner because suuuuurely the owner would have taken out insurance if the lender had told them the river behind their house could flood!).
Papa – There is a need to differentiate between wind damage and flood damage. Wind damage is more likely to be covered by homeowners insurance. Flood damage is not covered and there are fights between insurance companies and property owners whenever there is damage from both wind and water. Milton was more wind, especially nearer the Florida coast. Helene was more water except for some wind areas closer to landfall and especially in the non-coastal states.
Something that many people don’t understand about the “valley and ridge” provinces in the Appalachian states is that the only suitable development is in the valleys. It is typical to have a railroad and/or road next to the rivers in the valley bottoms. Then, the development is on the other side of the RR/roads. Combine the valley morphology with a 1000-year rainfall event and you get everything covered with deep flooding and damaged due to the high velocity floodway flows. Channel erosion/migration is also common. The end result is to have flood damage well beyond the boundary of a floodplain map used to regulate new development.
Larger communities can bounce back from disasters more quickly than smaller ones. At least 40% of small businesses impacted by disasters never reopen and another 30% don’t last another 2 years. There federal regs that allow critical reconstruction to bypass the normal project review process when federal funds are used – like for Interstate 40 reconstruction. But there is a grim outlook for smaller communities, especially the ones that have been washed away entirely. I would be surprised if some don’t come back at all. As of earlier this year, the Federal Flood Risk Management Standard (FFRMS) is now in place, so combine floodplain development regulations and any development that does come back will be much more resilient than before – just that it will be a fraction of what it was pre-flood.
I know you’re always looking for investment opps. After these catastrophic disasters, there is usually a good run on lumber.
Agree with everything you just said.
The problem we all face now is the growing frequency of these 1/1000 year events. And it doesn’t have to be a hurricane. Record rainfall is happening all over the planet; like the Sahara desert, China, Europe, or Roswell NM. And very few are adequately insured against it.
Sadly, it is going to get worse.
For each 1C increase in global temperature, the atmosphere can hold 7% more water. This is resulting in more 1/1000 year rain events.
https://www.elpasotimes.com/story/news/local/new-mexico/2024/10/20/roswell-nm-flooding-turns-deadly-as-record-rainfall-hits-ufo-town/75764878007/
Apologies, but watching football too…
In a world with no reserve requirements (US, anyway), and eventually everything sits with the Fed, what difference does it make to make the depositors whole rather than losing their deposits other than to destroy the fiat that was most likely lent into existence anyway? What does the $250k cap do? Why a safekeeping bank in this scenario? Your deposits just sit in USD at the Fed or another Fed bank.
(not that I agree at all about how the Fed operates, but it’s where we’re at now).
I have an unlimited cap – with zero risk.
I don’t know why this is confusing.
I will do another post.
Agreed on premise, but if FDIC was unlimited backed by digits at the Fed? Is that the same end result?
I mean the immediate thoughts of corporate financial abuse is there, but could it be constrained?
1. Separate lending banks from deposit banks
2. End the Fed
3. Balanced Budget Constitutional Amendment requiring 2/3 vote in both houses to temporarily override.
FIFY
Great 6 proposals.
No. He has 3 too many.
1. Separate lending banks from deposit banks
2. End the Fed
3. Balanced Budget Constitutional Amendment requiring 2/3 vote in both houses to temporarily override.
1. Must be done, or anything else done is a waste of time imo.
2. Way past time for that, as that sham has been shown way too many times already.
3. This restraint would cause upheaval in the Business World, at the highest levels, therefore it will never be “Allowed” to occur imo. Not that is shouldn’t, because it would be awesome to see!!!
Just have the FED print more paper dollars to cover the losses.
Every time the U.S. spends more than it takes in they should minus the percentage from the annual tax bill of every citizen with an adjustment for the inflation they cause.
Or they could just print the amount of taxes they are trying to collect. But either way you are talking about negative taxation.
Maybe Russia will let them join BRICS if they can find any gold left to buy to cover the 40% backing for membership.
Earth to Fed, the essence of fractional reserve lending is “the bank’s assets were less than its obligations to its creditors and others.”
Money market funds already function as safekeeping banks – just need to enable them to be used to pay credit card bills and many consumer banking needs evaporate.
Money market funds are liquid, but not as liquid as bank accounts. Besides, if I mentioned the term to 90% of people I know, they would believe I practiced witchcraft.
Money market funds with recourse to Federal Reserve repo facilities are every bit as liquid as bank accounts.
It’s fundamentally the same mechanism that guarantees that your bank can give you money on demand. The typical bank doesn’t have much in reserves – they borrow from the Fed when they need those to meet withdrawal requirements.
The only reason a bank account appears to be more liquid to you is because we don’t know what the bank is doing with the other side of their balance sheet!
If banks are going to continue to exist there should be a legal requirement to make all banking ledgers transparent, so anyone with funds at risk (>$250K) can see the risks.
re: “Separate lending banks from deposit banks”
The DIDMCA of March 31st did exactly the opposite. It created the S&L crisis.
My Six Recommendations: AUDIT THE FED would then be performed by an EX-Banker turned Auditor, in a revolving door situation which means that nothing will be found, “move along!”
Mish it is quaint to expect Government Officials and Banker to somehow self-regulate or actually BE regulated because the entire structure is designed with one goal in mind: TO STEAL.
Morality and Ethics are foreign words and concepts which do not apply to Governments.
AUDIT THE FED – Performed Quarterly by the Opposing Party “NOT IN CHARGE” and Overseen by a Board Made up of revolving Citizens (12 but 6 from each Party), with obvious credentials to do so. Picked via a Raffle.
With with goal in mind: TO STEAL – Then these folks above, better be prepared, with ALL the DATA to: “Stop the Steal”
Morality and Ethics are foreign words – Let’s bring them back with a vengeance then, but now moving forward, They Will Be “Held Accountable”
Easy enough to do…
When Silicon Valley Bank went tits up didn’t our lovely government cover all those depositors with most of them having way over 250k. I guess these guys aren’t big donors to the demon oh crap party
That bank was a seeya money laundering operation which served its purpose, then swept under the rug. Wouldn’t be surprised if the depositors with balances way over 250k were connected to Diddy.
What difference would it make if fraud is involved and the safekeeping bank didn’t keep the money safe?
Plus who is so rich and stupid at the same time to keep that much money in a single bank? Don’t keep your eggs in one basket.
Individual people rarely keep that much cash in an account (uber rich maybe).
But businesses do all the time because otherwise how would they make payroll deposits? 250K/100 employees is only 2500 dollars. That’s probably not even a weekly pay check. Plus where do you think the money goes that comes in from sales etc.
Yeah, that’s why Japan insures just transaction deposits.
Something Sheila Bair recommended.
It would be automatic.
Banks would be audited.
Anyone caught lending or doing anything else would be imprisoned for life.
In short, It wouldn’t happen.
Imprisoning people for life for making private loans? If that type of legal change is what is required to make this alternative system actually work, I’m not surprised it hasn’t happened yet.
Twenty-five years ago you could have a bank account directly at the Banque de France which is the French Central Bank. A credit card from the bank had a lot of prestige value because they were very hard to get. They offered almost full service but they phased out private clients over a few years.
FATCA killed Americans ability to use foreign banks – they even reject dual nationals because they don’t want the burden of having to report on their users to the US govt.
I forgot to say that you had to be a French citizen to have an account there although they did make exceptions for oil sheiks and the like.
I use a French bank but a few years back the bank was wondering if they could keep me but in the end US-French negotiations took care of it. They report what I do to the US and all is well.
Post Office banks in several countries operate in that way or at least they used to. As customers demanded more and more services that other banks offered, these postal banks had to become more bank-like and that undermined their usefulness to the governments who ran them. Basically, customers liked the 100% government guarantee but not the bare-bone services offered.
Outstanding 6-point plan, Mish!!!
I can get behind those 100%
JAYW, except that it will never happen unless things COLLAPSE and the Government folks are run out of town and THAT cannot happen.
Finally, the new REGIME would lie, cheat and steal as well because it is SOOO easy to steal Tax money!
“Contrary to popular myth, 100 percent reserves would not stop lending. Banks don’t lend deposits. Rather loans create deposits.”
Excuse my ignorance.
So let’s turn it around: where does the money for the loan come from, excluding issuing bonds? Because if it just punching number into computers, what constraints the banks to create unlimited amount of it.
If 100% reserves on deposits, for every dollar deposited, there is one dollar held at the bank. So is this a charitable activity of the banks?
If the above is true, then banking and central banking is a bigger Ponzi scheme than generally believed.
THE BIGGEST PONZI scheme is OUR COUNTRY, financed by printing new 1’s and zeroes on a page. DONE!
There are two types of banks.
Lending banks and deposit banks
The lending bank would be able to lend money into existence subject to capital rules.
It would not hold deposits.
Capital raised by the bank would not be guaranteed. Banks would raise capital however they want, most likely by issuing bonds.
Depositors of safekeeping banks have zero risk.
I will write this up further in a new post.
I look foward to this future post, Mish. My two cents beforehand:
Because if your lending banks are going to get money (not from deposits, but) from issuing bonds, that is going to be some expensive funding source.
Bond lenders are going to give these banks worse rates than the Federal government which is risk-free. And to be safer and get more funding, the lending banks will likely have to duration match which is going to cost them even more (imagine how few people will lend a local bank money for 30 years to give a mortgage to another regular person). And if the capital is not guaranteed, neither will the lending bank’s bonds be guaranteed, so even more expensive to get bond funding for bank loans.
Maybe that’s what the US economy needs, but this sounds like it will seriously increase the cost of long-term bank funding for cars and mortgages for everyone needing a loan. Won’t affect me because I refinanced my home with super-low mortgage rates. But I wonder what people needing new loans will think?
Showing your age.
Are you trying to show you are clueless? If so, you succeeded.
Strong economies don’t have bank failures.
2 failures in the entire year is remarkably low.
https://www.fdic.gov/resources/resolutions/bank-failures/in-brief/index.html
Yes it is Kind of makes me wonder
They do when the bank officers rob the bank.
No SVB $250,000+ depositor treatment for these folks?
Audit the Fed
By whom?
Ron Paul and Peter Schiff
+1 for Ron Paul
SEE MY COMMENTS. The “auditors” would be REVOLVING DOOR STUDIOUS TYPES with wire rim glasses. AND, a WINK-WINK!