The Vulnerability of American Banks to Insolvency and the Role of Cryptocurrencies

According to reports, Nouriel Roubin, a well-known economist who is opposed to cryptocurrencies, interrupted in a recent MarketWatch column that most American banks are technically close to bankruptcy, and hundreds of American banks have become completely insolvent in terms of capital quality, Rising inflation reduces the true value of bank liabilities (deposits) by increasing banks’ “deposit franchises” (assets that are not on their balance sheets). The experience of U.S. regional banks such as Silicon Valley Bank shows that deposit stickiness cannot be guaranteed. When banks sell securities to meet withdrawal needs, unrealized securities losses become reality, leading to bankruptcy. （cryptoglobe）

“Dr. Doomsday” Nouriel Roubini: Most American banks are technically close to bankruptcy

In recent times, the status quo of traditional financial institutions, banks in particular, has been brought to question. Reports indicate that most American banks are technically close to bankruptcy, and hundreds of them are completely insolvent when it comes to capital quality. This situation has been attributed to the rising inflation that has led to a decrease in the true value of bank liabilities, coupled with the increasing deposit franchises that are not reflected on their balance sheets. In addition, the experience of regional banks such as Silicon Valley Bank shows that deposit stickiness cannot be guaranteed, which further exacerbates the situation. Furthermore, when banks sell securities to meet withdrawal needs, unrealized securities losses become a reality, leading to bankruptcy. Nouriel Roubin, a well-known economist, has been vocal about his opposition to cryptocurrencies, but many are now questioning if they could be a remedy to this highly volatile situation.

The State of American Banks

According to reports, most American banks are technically close to bankruptcy or completely insolvent when it comes to capital quality. While this may seem shocking, it’s important to understand that banks operate on a system of trust. They take deposits from customers and use them to make loans to other customers. As a result, banks must maintain a certain amount of cash on hand to ensure they can meet withdrawal requests from customers. However, when inflation rises, the true value of bank liabilities reduces, and the bank’s deposit franchises, which are not reflected on their balance sheets, increase.

Regional Bank Experiences

Regional banks such as Silicon Valley Bank have experienced deposit stickiness issues, which means that deposits are not guaranteed to remain with the bank. When customers withdraw money, banks may need to sell securities to meet the withdrawal, which could lead to unrealized securities losses becoming a reality, ultimately leading to a bank’s bankruptcy.

The Role of Cryptocurrencies

Cryptocurrencies, such as Bitcoin and Ethereum, are decentralized digital currencies that use blockchain technology to enable secure and verifiable transactions between users. While Nouriel Roubin has been vocal about his opposition to cryptocurrencies, many believe that they could be used as a remedy to the highly volatile state of traditional financial institutions.

The Advantages of Cryptocurrencies

One of the benefits of cryptocurrencies is that they are decentralized, meaning they are not controlled by any central authority, including financial institutions or governments. This means that cryptocurrencies cannot be manipulated or controlled in the same way that traditional investments can be.
Another advantage of cryptocurrencies is that they are more secure than traditional investments. Because cryptocurrencies use blockchain technology to enable secure transactions, there is no risk of fraud or tampering with transactions. As a result, investors can be confident that their investments are safe and secure.
Finally, cryptocurrencies are highly transparent, meaning that investors can always see how their investments are performing. This gives investors more control over their investments, which can be especially beneficial during times of financial volatility.

The Disadvantages of Cryptocurrencies

While cryptocurrencies have advantages, they also have disadvantages. One of the biggest disadvantages of cryptocurrencies is that they are highly volatile. This means that the value of cryptocurrencies can fluctuate quickly and dramatically, which can be risky for investors.
Another disadvantage of cryptocurrencies is that they are not widely accepted as a form of payment. While some companies do accept cryptocurrencies for payment, they are not accepted by mainstream retailers or financial institutions. This limits the usefulness of cryptocurrencies as an investment option.
Finally, cryptocurrencies are not regulated by any government or financial institution. While this provides investors with more control over their investments, it also means that there is no recourse in the event of fraud or other issues.

Conclusion

The vulnerability of American banks to insolvency is a matter of great concern. The rising inflation, coupled with the increasing deposit franchises not reflected on their balance sheets, is a recipe for disaster. However, while cryptocurrencies have advantages, they also come with their own set of risks and challenges. As investors continue to explore new investment options, it’s important to understand the pros and cons of each investment to make informed decisions.

FAQs

Q: Are American banks really close to bankruptcy?
A: According to reports, most American banks are technically close to bankruptcy or completely insolvent when it comes to capital quality.
Q: Could cryptocurrencies be a remedy to the state of American banks?
A: While Nouriel Roubin has been vocal about his opposition to cryptocurrencies, many believe that they could be used as a remedy to the highly volatile state of traditional financial institutions.
Q: What are the advantages of cryptocurrencies?
A: Cryptocurrencies are decentralized, more secure than traditional investments, and highly transparent.