Source: Golden Ten Data

Less than a year until the banking crisis of 2023, yet another US bank has gone out of business.

Among previous crises, including$SVB Financial (SIVBQ.US)$Several large banks, including signature banks, have gone out of business. At the time, many analysts predicted that the wave of bank failures was not over, and that more banks would go out of business.

But for most of last year, the banking industry in the US region has been quiet, and the banking system has been quite calm, thanks in large part to the emergency plan developed by the Federal Reserve to bail out other troubled banks, the so-called “Bank Term Financing Plan” (BTFP), which expired a few weeks ago. In other words, the Federal Reserve is no longer providing emergency loans to troubled banks.

And just a month after the plan was halted, the first “victim” of the year appeared: the Pennsylvania-headquartered Republic First Bank was taken over by regulators last Friday.

Republic First Bank, like other US regional banks that went out of business last year, had the same problem — too many “unrealized bond losses” on their balance sheets. Just like Silicon Valley Bank and signature banks last year, Republic First Bank used customer deposits to buy US Treasury bonds in 2021 and 2022. At that time, the price of US bonds was at the highest level in history.

By early 2023, the situation was reversed. The price of bonds has plummeted, and the price of even US Treasury bonds, which are considered “safe” and “stable,” has fallen sharply, and banks have suffered huge losses.

When interest rates rise, bond prices fall. As a result, when the Federal Reserve raised interest rates from 0% to 5% to control inflation, they caused huge losses in the bond market, which also meant that banks were suffering huge losses.

Silicon Valley Bank is just the tip of the iceberg. Many other banks have accumulated huge losses on bonds. In fact, the total unrealized losses in the US banking sector reached a staggering $620 billion last year.

The Federal Reserve knows they are facing a huge problem. So they created BTFP, which is basically a huge “hypothetical” game.

With BTFP, banks can use their bond portfolios as collateral to borrow money from the Federal Reserve. However, everyone just pretends that these bonds are still equal to face value, rather than valuing the bonds at actual market prices.

Last year, the Federal Reserve successfully prevented any embarrassing bank failures through this plan. Now BTFP has expired, but it is clear that the problems with the banking system have not gone away. First Bank of the Republic is just one example. Because bond prices are still falling (interest rates are still well above the level of 2021-2022), banks are still sitting on huge unrealized losses.

Now that the Federal Reserve has stopped “imagining,” bank failures have begun again. That's not to say that all banks are in bad shape; some banks have actively used BTFP over the past 12 months to fix their finances. Unfortunately, most banks haven't done this, which is why there are still over $500 billion in unrealized losses in the US banking system. This means that Republic First Bank will probably not be the only bank to go out of business this year, unless the Federal Reserve enters the market again with a “life-saving drug.”

The reality, however, is that there are still many banks with large unrealized losses. And the largest of these happened to be the Federal Reserve.

According to the Federal Reserve's own financial statements just released last month, the Federal Reserve's total unrealized losses are close to 1 trillion US dollars, or more accurately, 948.4 billion US dollars. And the vast majority of these unrealized losses came from US Treasury bonds. So just like Bank of Silicon Valley,$Signature Bank (SBNY.US)$,$First Republic Bank (FRCB.US)$Like the current First Bank of the Republic, the Federal Reserve is completely bankrupt.

In fact, the total capital of the Federal Reserve is only 51 billion US dollars, while losses are as high as 948 billion US dollars. This means that the Federal Reserve's insolvent ratio is 19 times higher. Of course, many people would insist that this is irrelevant, just as they insist that America's huge debt is irrelevant, but this is an even more ridiculous fantasy.

According to a report released by the US Federal Deposit Insurance Corporation (FDIC), the US banking industry's unrealized losses exceeded 500 billion US dollars, while the Federal Reserve itself, which would theoretically bail out the banking industry, had losses of 900 billion US dollars. The US government was supposed to bail out the Federal Reserve, but now the US government also has more than 50 trillion US dollars in debt. This is debt over and over.

Just like BTFP, everyone wants to play a huge “what-if” game, pretending that the Federal Reserve's solvency isn't an issue and that the US government's huge debt isn't a problem. On the contrary, they are huge challenges. The end result would be that the dollar could lose its status as a global reserve currency.

Editor/jayden