by
Simon Black
A friend of mine who’s an
equities analyst at a large brokerage firm recently sent out pretty
ironic note to all of his private clients.
He focuses on the financial sector, so his job is basically to
analyze bank stocks and figure out which ones his investors should buy.
To determine this, he does a deep dive on banks’ financial
statements, assessing everything from their capital levels to their
non-performing loan ratios.
That’s a fancy way of saying that financial analysts who concentrate
on bank stocks conduct a LOT of research to make sure the banks are SAFE
and will be in good shape in the long-term.
What struck me as so ironic about his most recent report was how FEW banks are actually safe these days.
Bank balance sheets, particularly in western nations, have eroded substantially over the last few years.
Capital reserves are in the toilet… meaning the banks themselves have
very little tucked away for a rainy day fund. If asset prices start to
fall, western banks could easily slip into insolvency.
Liquidity ratios are also appalling. Banks keep an incredibly LOW
ratio of high quality liquid assets (including cash) on reserve as a
percentage of customer deposits.
So if any meaningful portion of the banks’ customers wanted to
withdraw their funds out of the system, the banks simply wouldn’t have
the money.
My friend’s conclusion about bank stocks was that very few of them are worth owning.
Some are at risk of going under. And the others will be too busy
trying to raise their capital ratios, unable to generate much profit or
pay dividends to their shareholders.
But this raises a very interesting point: investors spend a lot of
time analyzing bank stocks to see whether or not they should invest.
Yet very few people analyze the banks themselves to see whether or not to deposit money there.
This is totally backwards.
Banks are, for better or worse, our financial partners. They’re holding the money.
And while this model is changing rapidly, banks remain an absolutely critical part of our lives.
But there’s almost ZERO analysis that goes into selecting a bank.
These decisions are usually made because the bank is conveniently
located across the street, not due to its fundamentals.
Crazy. Banking as an industry has been about as deceitful as the
political establishment. They never miss an opportunity to cheat their
own customers.
They conspire to fix interest rates in their favor. They manipulate
asset prices. They inflate fees and commissions for foreign exchange.
They treat us like criminal terrorists when we have the audacity to ask for our own money back.
They take our hard-earned savings and make the most mindless and
destructive loans. And then when the whole house of card collapses they
claim that they’re too important and demand to be bailed out at taxpayer
expense… only to shower themselves with fat bonus checks.
And they consistently make the same mistakes over and over again,
while using clever accounting tricks to hide their true financial
condition.
Handing over our life’s savings to an institution with such an abysmal track record demands a modicum of analysis.
And if you pop the hood and look at the inner workings of your bank,
more than likely you’re not going to be happy with what you see.
Again, most banks, particularly in the West, have extremely low
levels of liquidity. So perhaps it’s no surprise how many western
nations are establishing “bail-in” rules.
This means that the next time your bank runs into trouble, they’re
pre-authorized to steal their depositors’ savings instead of going to
the government for a bailout.
You’d think that with this kind of history and level of risk we would
give a bit more thought before handing over all of our money.
To make the best decision on where to put your savings, why not think
like a savvy investor and take look at your banks’ finances?
You can get started right now, as large banks usually publish annual financial reports online.
(If your bank is private and refuses to provide its balance sheet to
you on request, that’s all you need to know about that bank. Take your
money and run.)
In a bank’s financial report you want to look for two main things: the bank’s liquidity and its solvency.
A liquid bank is one that holds plentiful liquid assets and cash
equivalents on hand to be able to honor all withdrawal requests.
An easy way to determine this is by dividing the bank’s cash and cash equivalents by its total customer deposits.
Liquid banks are safer, and this ratio is key in a financial crisis.
Illiquid banks will be the ones ‘bailed in’ by their depositors.
Simultaneously, a solvent bank is one whose assets are far greater than its liabilities. It’s like having a large net worth.
Depending on what a bank is invested in, the value of its assets can
drop significantly when there’s a market shock. And if the drop is great
enough it can quickly become insolvent.
Healthy banks hold strong capital reserves on their balance sheets
and maintain a high ‘net worth’. You can calculate this by looking at a
bank’s total capital divided by its assets.
The higher the percentage, the safer the bank.
These are just two very basic numbers to look at when determining the
safety of your bank. And it’s imperative to start asking questions.
After all, there’s a lot at stake.
If you don’t feel comfortable with the results, think about changing banks. And leave out geography in your decision.
It’s 2016, not 1916. Your money can ‘live’ on the other side of the
planet from you. And you might find that a foreign bank is MUCH safer
than where your money is currently.
More on that soon.
