Banking System Faces Renewed Crisis as Republic First Folds

Banking System Faces Renewed Crisis as Republic First Folds 

Less than a year has passed since the 2023 bank crisis, during which several major banks, including Silicon Valley Bank and Signature Bank, went under. Back then, I predicted that more banks would face similar fates, and it seems my prediction is coming true.

Things seemed calm in the banking world for a while, mainly due to an emergency program by the Federal Reserve called the Bank Term Funding Program (BTFP). This program, designed to bail out struggling banks, recently came to an end. And almost immediately after its expiration, we saw the first casualty: Republic First, based in Pennsylvania, was closed down by regulators.

Republic First encountered the same problems as the banks that failed last year: significant losses on their balance sheets due to plummeting bond prices. Like other banks, Republic First had invested their customers' deposits in US Treasury bonds when prices were high, only to suffer when bond prices dropped dramatically in 2023 due to rising interest rates.

The Federal Reserve attempted to mitigate these losses through the BTFP, essentially allowing banks to borrow money by using their declining bond holdings as collateral. However, the program relied on an artificial valuation of these bonds, ignoring their actual market value.

Now that the BTFP is no longer in effect, the underlying issues in the banking system are resurfacing. Republic First's failure is just the beginning.

The banking sector still faces substantial unrealized losses, primarily due to ongoing declines in bond prices and potential losses from other investments, such as loans on office properties.

While this situation doesn't seem as dire as the 2008 financial crisis, it's concerning nonetheless. Many banks are struggling with significant unrealized losses, including the Federal Reserve itself, which reports nearly $1 trillion in unrealized losses, primarily from US Treasuries.

Despite these alarming figures, there's little discussion about the solvency issues facing the Federal Reserve and the broader US government, which is burdened by trillions of dollars in debt.

These challenges pose a serious threat, potentially leading to the downfall of the US dollar as the global reserve currency.