The rate of inflation over the past several months has caused concern for many Americans regarding the stability of our banking system. A higher percentage of Americans have moved some savings from banks into cryptocurrency, gold and silver. But was this necessary?
The recent inflation was caused by American companies moving production overseas and the subsequent pandemic that caused supply chain shortages. Government borrowing from the Federal Reserve to allocate money to the Ukraine and government stimulus also increased the money supply significantly, resulting in a reduction in the purchasing power of the US dollar. What most Americans do not understand is we have a debt-based monetary system. All of our money is actually created by debt through loans. So when borrowing increases, we enjoy a more vibrant economy but see an increase in inflation, and government and consumer debt. To slow the debt crisis, the Federal Reserve began raising interest rates. This also decreased the amount of money in circulation due to less borrowing, which could cause a recession.
The Federal Deposit Insurance Corporation (FDIC), a US government independent agency, ensures bank deposits up to $250,000. There is currently over $22 trillion in the banking system. However, the FDIC has only about $124 billion dollars in assets plus a US Treasury credit line of $100 billion. In the unlikely scenario where all banks collapse, American banks could not cover about 98 percent of the money on deposit in the banking system. What is worse is that when a bank becomes insolvent, the last to receive money from a bankruptcy are unsecured creditors, which is you, the consumer.
So, the questions are will we see more bank failures and should you be concerned? Silicon Valley Bank, Signature Bank and First Republic Bank, which recently collapsed, together had nearly $500 billion dollars in assets. The FDIC will be spending billions of dollars to protect the uninsured depositors at Silicon and Signature Banks. First Republic Bank was bought by JP Morgan Chase.
In 2008 and 2009, nearly 500 banks failed. The good news, however, is that the big banks are better capitalized today than they were during the previous crisis and are subjected to stricter liquidity coverage. This means they may have the ability to pay deposit withdrawals and could help support struggling banks to help prevent the need for government assistance. So, should you be worried about your deposits? Probably not. Nevertheless, should the number of bank failures begin to escalate, you should contact your tax accounting professional for advice. We offer complimentary planning advice to our clients.
Professional Tax Services is a locally-owned provider serving over 3,500 local residents and businesses. For more information, call 661-259-1967 or visit www.scvprotaxservices.com.