FDIC

Update 5:10pm ET): In the latest major escalation, late on Saturday European nations together with the US have issued a joint statement in which they announce the following restrictive economic measuresthings: 

Commit to ensuring that "selected Russian banks" are removed from the SWIFT messaging system: "This will ensure that these banks are disconnected from the international financial system and harm their ability to operate globally." 
Commit to imposing "restrictive measures that will prevent the Russian Central Bank from deploying its international reserves in ways that undermine the impact of our sanctions." 
Commit to "acting against the people and entities who facilitate the war in Ukraine" by taking measures to limit the sale of citizenship, so called golden passports, that let wealthy Russians connected to the Russian government become citizens 
Commit to launching "a transatlantic task force that will ensure the effective implementation of our financial sanctions by identifying and freezing the assets of sanctioned individuals and companies that exist within our jurisdictions." 
Stepping up or coordination against disinformation and other forms of hybrid warfare. 

EU Commission president Ursula von der Leyen broke these down further as follows: 

The full statement can be found here. It wasn't immediately clear which are the "selected Russian banks" or what "restrictive measures" will be taken against the central bank. It also does not detail whether oil and gas payments will stop (according to Bloomberg's in house energy expect Javier Blas, the answer is no).

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I know everyone is talking about stock market all time high’s right now, but its hard for me to hear them over the sound of hundreds of trillions in unfunded liabilities. Unfunded liabilities are debts payable at some point in the future that are currently not covered by cash or assets held on the balance sheet. The US has a growing number of unfunded liabilities (to the tune of over $200 TRILLION) and we will cover most of them, but for the purposes of this we only need to talk about FDIC. 

As a part of the banking reform under the FDR new deal, as we discussed yesterday, the Glass-Steagall act limited commercial bank securities activity and regulated speculation. It also established the Federal Deposit Insurance Corporation which insured every banking deposit in the US with up to $2,500. This was an attempt to shore up bank reserves and stem the tide of bank runs happening across the country. 

Over the years since the FDIC’s inception, the total value of insurance has increased up to $250,000 (thanks inflation) and is now only offered to member banks. The way the system was supposed to work is as a private insurance fund. Member banks pay into a shared pool of funds which are drawn upon in the event of a crisis. 

However, as risky lending practices have ramped up over the years thanks to loose fiscal policy and the recent 0% reserve requirement for banks the value of this fund has become an aberration. The idea of FDIC being “private insurance” is all but laughable. On a good day, the Deposit Insurance Fund has about $100 Billion on hand. Most days, Banks have around $15 Trillion in insured deposits. Yes you read that right. FDIC could never cover even one percent of outstanding deposits…on a good day. 

A real insurance fund would have to underwrite risk of payout into its policy but the FDIC takes into account none of the consequences cheap credit and loose money have had on the stability of the banking system. A cascade of liquidation could easily wipe out not only the cash banks do have on hand, but also every cent of the insurance fund. 

This is where the lender of last resort comes in. The FDIC has a $100 billion line of credit with the US Treasury, and given past precedents you can almost guarantee that line of credit would be extended indefinitely in the event of a crisis. But wait, you say, the treasury is also insolvent, does the US not have $26 TRILLION in debt and growing by the second? To which I say, certainly, and don’t forget about the hundreds of Trillions in unfunded liabilities! 

This is what’s so great about having a lender of last resort. The banks pay into insurance funds to shore up their deposits, the treasury can back that insurance fund with a line of credit, and the Fed can create infinite amounts of new money and credit to back it all up. You see, at the end of the day the idea that FDIC is “insurance” is laughable. 

We’re the liquidation ever allowed to run its course, the Fed would assuredly step in and provide “unlimited liquidity” to meet deposit demand for member banks. FDIC is not insurance at all, but rather a clever way to link your checking and savings accounts to the money printer. 

The illusion of safety.

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