FX168 Financial News (Asia Pacific) News ZeroHedge, a well-known financial blogger, said that the total capital of the Federal Reserve is only 51 billion US dollars, while losses are as high as 948 billion US dollars, and it is already seriously insolvent. The article mentioned that with the expiration of the bank's Bank Term Financing Plan (BTFP), Republic First Bank exploded and went out of business, setting off a new round of banking crisis.
After major banks, including Silicon Valley Bank and Signatory Bank, went bankrupt, the banking system returned to calm for most of 2023. This is largely due to the emergency plan formulated by the Federal Reserve to bail out other troubled banks, which is a BTFP tool well known in the market.
However, the plan actually expired a few weeks ago. In other words, the Federal Reserve is no longer providing emergency loans to troubled banks.
“Just a month later, we have already witnessed the first lightning explosion. The Pennsylvania-headquartered Republic First Bank was shut down by regulators last Friday (April 26),” ZeroHedge wrote.
(Source: Twitter)
Republic First Bank has the same problems as other companies that went out of business in 2023, with too many “unrealized bond losses” on their balance sheets. Just like Silicon Valley Bank and Signature Bank last year, First Republic Bank used customer deposits to buy US Treasury bonds in 2021 and 2022, when bond prices were at historically high levels.
By early 2023, the situation was reversed. The price of bonds has plummeted, and even the price of US Treasury bonds, which are considered “safe and stable,” has dropped sharply, and banks have suffered huge losses.
ZeroHedge emphasized: “Keep in mind that when interest rates rise, bond prices fall. As a result, when the Federal Reserve raised interest rates from 0% to 5% to try to control inflation, they also caused huge losses in the bond market, which also meant huge losses for banks.”
Silicon Valley Bank is just the tip of the iceberg; many other banks have suffered huge bond losses. In fact, the total unrealized losses in the banking sector reached $620 billion in 2023.
The Federal Reserve knew they were facing a huge problem, so they created this BTFP Bank Regular Funding Plan, which is basically a huge “fictional” game. Through the BTFP tool, banks can use their deteriorating bond portfolios as collateral to borrow from the Federal Reserve. But instead of valuing bonds according to actual market prices, everyone simply pretends that these bonds are still worth the same.
In other words, banks simply price their assets, and the Federal Reserve allows them to do so.
In 2023, the Federal Reserve successfully prevented any further embarrassing bank failures by sprinkling this “magic powder” throughout the banking system.
But now that BTFP has expired, the problems in the banking system have clearly not disappeared. The failure of Republic First Bank a few days ago was just a symptom.
ZeroHedge mentioned: “Think about it, bond prices are still falling because interest rates are still much higher than 2021-2022, and banks are still facing huge unrealized losses. Now that the Federal Reserve is no longer playing pretend games, bank failures have begun again.”
“It's not that all banks are in bad shape; it's that all banks are in bad shape. Some banks have wisely used the past twelve months to overhaul their financial institutions. Unfortunately, most don't, which is why the US banking system still has more than $500 billion in unrealized losses. This means Republic First may not be the only failure unless the Federal Reserve steps in again with 'magic fans',” the blog continued.
Also keep in mind that the loss of the US Treasury portfolio isn't the only problem with the banking system. For example, many banks face huge potential losses due to office loans.
The report stated, “We think this problem is far less serious than the 2008 financial crisis. At that time, some of the largest banks in the world went out of business due to the financial crisis, which was far worse. However, the reality is that quite a few banks still have large unrealized losses, the largest of which happens to be the Federal Reserve.”
According to its financial statements just released last month, the Federal Reserve's total unrealized losses reached almost 1 trillion US dollars, or more accurately, 948.4 billion US dollars. The vast majority of unrealized losses came from US Treasury bonds. As a result, like Silicon Valley Bank, Signature Bank, First Republic Bank, and now Republic First Bank, the Federal Reserve is completely insolvent.
In fact, the total capital of the Federal Reserve is only 51 billion US dollars, and the losses are as high as 948 billion US dollars, which means that the Federal Reserve has gone bankrupt more than 19 times.
“If you think about it, the world's largest and most important central bank, the manager of the global reserve currency, is completely insolvent in terms of market value. You might think this will be front-page news, but no one has ever talked about it, or even wanted to talk about it,” the report said.
“Of course, a lot of people will insist that it's not important, just like they insist that treasury bonds aren't important. But this is an even more ridiculous fantasy. Let's take a look at the facts. The report released by the US FDIC shows that the US banking sector has unrealized losses of more than 500 billion US dollars.”
The Federal Reserve would theoretically bail out the banking industry, but it itself would be unable to pay 900 billion dollars in debt.
The US government, which was supposed to bail out the Federal Reserve, is unable to pay more than 50 trillion dollars of debt.
The report concluded that just like BTFP's bailout tool, everyone wants to play a huge “pretend” game, pretending that the Federal Reserve's solvency is not a problem, and that the US government's huge debt is not a problem. But on the contrary, they are huge challenges. The ultimate consequence would be for the US dollar to lose its status as a global reserve currency.