http://www.bankrate.com/nsc/news/chk...?prodtype+bank
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very true.
There are also a few more items which I find even more disturbing, like ...
the bank doesn't actually have enough money available to cover withdrawls if more than a tiny percentage of bank customers attempt to withdraw their assets at the same time.
the bank has actually leveraged a large percentage of depositor's money into financial derivatives, which have the potential of bankrupting the financial institution overnight with any extreme moves in currency exchange rates, real estate market values, interest rates etc. which the bank has positioned itself on the 'wrong' side of the derivatives markets.
"It's a wonderful life" is only a movie. Money is not the same thing as cash. If you have a billion dollars in an account, you can get a cashier's check for that amount. Or you can wire the money. Always. It happens every day. If a bank is short, they borrow from other banks. It's called banking. The S&L crisis is over.Quote:
Originally Posted by Melonie
And of course the FDIC insures all accounts to $100K.
This is insane. Banco de Lima maybe. Not in the US. Derivatives are in fact much higher risk than junk bonds. If this is true heads must roll. FDIC would never insure such a bank. But worse has happened.Quote:
the bank has actually leveraged a large percentage of depositor's money into financial derivatives, which have the potential of bankrupting the financial institution overnight with any extreme moves in currency exchange rates, real estate market values, interest rates etc. which the bank has positioned itself on the 'wrong' side of the derivatives markets.
Men landed on the moon, too. ....I think.
You'd better take a look at , and particularly look at table 2 - Credit Exposures of 5 largest derivatives banks. Also note that if you add up the value of the derivates contracts of just these 5 banks they equalled some $56 trillion dollars (two years ago, higher today) - which was over 5 times the annual gross domestic product of the entire USA, and in JP Morgan's case some 1.4 times the value of ALL deposits plus assets held by JP Morgan. Nobody but nobody is going to cover JP Morgan's ass if they try to liquidate all of their assets plus borrow a mere $10 trillion or so in 'unsecured' loans to cover the shortfall. This is not all idle speculation either - check out Barings Bank's history.Quote:
This is insane. Banco de Lima maybe. Not in the US. Derivatives are in fact much higher risk than junk bonds. If this is true heads must roll. FDIC would never insure such a bank. But worse has happened.
If some of these derivatives go belly up, then the FDIC will be tasked with coughing up cash to pay off insured accounts which are probably roughly equal to one year's gross domestic product of the entire USA ! Hey, no problem, the gov't will just confiscate 100% of every American's paycheck for a year to cover this cost, right ?
I would add that the lion's share of these derivative contracts are traded in the over the counter market or by private placement, meaning that actual regulation and oversight are token at best. Instead the entire economic foundation of America effectively rests in the hands of a few big bank derivatives managers, the fed, and the future earnings of US taxpayers.
Interesting article, but it does not reflect what you said:
"In terms of the number of institutions holding derivatives, a vast majority of the banks that use derivatives (339 or 77 percent) hold them solely for hedging purposes. However, in terms of dollar volume, these hedging-related holdings amount to less than one half of one percent of total notionals. Most of the derivatives (90 percent) held for hedging purposes are interest rate contracts, indicating that banks are mostly using derivatives to hedge interest rate risk. "The great danger for banks that has necessitated their holding of these hedge derivatives is the absurdly low interest rates. If prime goes up by just one percent, the effect on the monetary market is enormous. These hedge funds are held to stabilize such a potential event. These derivatives actually decrease market exposure for banks.
I believe your explanation of the notional value risk of derivative contracts is similarly flawed. The notional value is not an obligation. It is a projection of the derivative contract, not the actual value of the contract:
"However, the notional amount of a derivative contract is merely the reference point to the underlying instrument. It serves as the basis for calculating cashflows under the contract. .....The notional amount itself is seldom at risk of loss with derivatives. Instead the derivatives investor is at risk of loss from changes in prices of or rates earned on the physical or financial assets that the notional amount represents. "Your simplified example with respect to JP Morgan is fundamentally flawed. The notional value is NOT an obligation.
I suggest instead that it is the USG's long term continuation of a ridiculously low interest rate that puts banks at risk, not what you perceive as speculative investments (still a tiny percentage of assets) in derivatives. This type of report is written to provide full disclosure of any possible risk. This is not a doomsday prediction.
Forgive me for saying this, but you are very accepting of the 'fedspeak' opinions. Here's an alternate analysis from a source which does not have a vested interest in sweeping derivatives risk under the rug.