The Reality of American Banks, Rising Inflation, and the Potential Impacts on Cryptocurrency

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 a recent MarketWatch column, Nouriel Roubini, a well-known economist known for his opposition to cryptocurrencies, made a startling statement that deserves further exploration. Roubini argued that most American banks are technically close to bankruptcy, and hundreds of American banks have become completely insolvent in terms of capital quality. As the value of dollar drops over time, rising inflation reduces the true value of bank liabilities, such as deposits. In turn, these low-quality assets could result in banks facing severe financial challenges, negatively impacting both the traditional financial system and the world of cryptocurrency.

The Risk of Bankruptcy

According to Roubini, the increasing inflation rate is putting most American banks on the brink of bankruptcy. This is a threat not only to the banks themselves but also to the broader financial system that depends on banking systems. Realizing that bank failure could destabilize the entire economy, the US government is unlikely to allow a systemic banking breakdown, which could result in a potential government bailout.
However, Roubini’s concerns are not unfounded. In fact, hundreds of American banks have already become insolvent in terms of capital quality. The experience of US regional banks such as the Silicon Valley Bank shows that deposit stickiness, which is the ability of deposits to stay put in a bank regardless of interest rates, cannot be guaranteed. When banks need to meet withdrawal needs, they are forced to sell securities. This leads to banks realizing securities losses and struggling with bankruptcy.

The Impact of Inflation on Bank Liabilities

Another concern that Roubini brings up in his MarketWatch column is the impact of inflation on bank liabilities. Inflation reduces the real value of a bank’s liabilities, such as quarterly profits, savings accounts, and deposits. On the other hand, bank assets, such as loans and securities, remain fixed in nominal value. As a result, a significant portion of bank assets now consists of “deposit franchises,” which are no longer represented as assets in the balance sheet. The increasing inflation rate reduces their true value, increasing the risk of bank failures.
Furthermore, the US government has been printing trillions of dollars in stimulus packages to revive the economy. This excessive printing of money could lead to massive inflation, further reducing the real value of bank liabilities. Banks may be required to increase collateral holdings to meet regulatory requirements. This could lead to a bank run, further exacerbating the bank’s liquidity crisis.

Cryptocurrency as an Alternative to Traditional Banking Systems

As American banks face these challenges, those invested in the world of cryptocurrency are presented with an opportunity. Cryptocurrencies, such as Bitcoin, offer a decentralized financial system that operates independently of traditional banking institutions. Cryptocurrencies, unlike traditional banking systems, are not susceptible to inflation and are not beholden to government regulations.
As a result, cryptocurrency may become a viable alternative to traditional banking systems, especially as bank failures occur. However, before one invests in cryptocurrencies, it is essential to understand the risks involved. Cryptocurrencies are highly volatile, and investors could lose money if they don’t invest properly.

Conclusion

The verdict is still out on whether a mass banking breakdown will occur. However, it is essential to note Roubini’s observations and prepare accordingly.
As we have seen, the American banking system faces significant challenges that could result in bank failures. Inflation, coupled with high-risk assets, could lead to a liquidity crisis, forcing banks to shut down. The increasing instability of the traditional banking system underscores the need for alternative financial systems, such as cryptocurrencies. Crypto investors should carefully consider the risks involved and acquire a deep understanding of what they are investing in.

FAQs

**1. Could the US government bail out banks in the event of a banking collapse?**
While it is uncertain what the US government’s actions would be in the event of a banking system failure, they are unlikely to allow a breakdown in the financial system. A potential bailout is not out of the question.
**2. Are cryptocurrencies immune to inflation?**
Cryptocurrency is not immune to inflation. However, it is decentralized, which makes it less subject to government regulation and traditional financial systems.
**3. What is bank run, and why does it occur?**
A bank run occurs when depositors are concerned about a bank’s solvency, and they start to withdraw their deposits. This creates a liquidity crisis, forcing the bank to shut down.