Should Private Banks Go Extinct?

Mar 14, 2023 | Finconomics 101, No Bull Economics

Since the 2008 Great Recession, 134 banks with assets of $1.25 Trillion have been closed by regulators. At the same time, the Fed’s ballooning balance sheet now amounts to nearly 50% of total domestic bank deposits.


In what form of the Metaverse do we prefer the government to take over & run an industry? While the Federal Reserve is not actually part of the U.S. government (although it is fair to say that it resembles the federal bureaucracy in more ways than one), it is clear from the data below that the private sector is losing serious market share in the banking sector. Not only does the Fed’s balance sheet now equal ~50% of total U.S. bank deposits, but it also is 2x the size of IYF’s (iShares U.S. Financials ETF) aggregate market cap. 

To make matters worse, the Fed’s balance sheet is poised to grow significantly higher as its new Bank Term Funding Program (BTFP) is offering loans of up to 1 year to depository institutions pledging U.S. Treasuries, agency debt, and mortgage-backed securities as collateral. It’s a great deal for the depository institutions as these assets will be valued at par even if they are trading at big discounts resulting from the Fed’s rate hikes. If this program existed a month ago, Silicon Valley Bank would still be in business.

Do private banks need to be regulated? Absolutely! Should the Fed take over the U.S. banking system? Absolutely not!! Further, it is our humble opinion that Americans would be better served by a well-diversified community of banks rather than concentrating the country’s financial risk among just a few.


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