The banking system is facilitated by uncollateralized debt; fractional reserve banking, which had seen the reduction of the reserve requirements to 0% in 2020.
On your bank’s balance sheet, there are assets labeled “cash on hand,” which includes cash and cash equivalents which is physical dollars, MM accounts, CDs, Short-term gov bonds, and Commercial paper
To date, CCEs are growing due to the recent inversion of the yeild curve. Because banks can receive high yields on short duration bonds, banks are locking in contracts, overleveraging themselves to the fullest extent. The reason being is that during 2020, the banks were buying bonds with no reserve requirements, giving out home equity and buisness loans with low interest rates, in turn, increasing inflation as money flowed freely. Now, banks are largely underwater due to these investments. Being that the short term yields are tremendously high, banks need to buy bonds to survive the increased inflation rate, highlighting the vulnerabilities of the banks, the absence of physcial cash. In other words, banks can’t sustain their means due to their positions and must buy bonds or hold cash in the RRP, therefore, physcial cash on hand is at an all time low. Banks such as JPM, just bagged a $40B loss, just a week or so after JPM CEO, Jamie Dimond, sold personal shares.
The play: Short banks; Go long scarce assets.
Theory: If enough people were to withdraw physical dollars at highly collateralized banks, the system will have to sell their investments, prematurely, and book their incredibly high losses. This will send a ripple effect, as it did with SVB before the FDIC stepped in, potentially recalling outstanding non-collateralized debts, such as credit card, and student loans. Eiither way, the system is over leveraged $22T:$1T [savings:FDIC pool] and becoming increasingly unstable. There is the potential that this event will occur naturally during the recession and 2024-2025 crypto bull run. However if the recession comes, there is a potential that the banks will create a tool to protect against bank runs, whether a new technology [CBDC] and/or legal bribery [lobbying]. Regardless, preparing and getting out of banks could be a risk mitigating tactic and possibly a life changing investment opportunity.
TL;DR: The banking system is over leveraged and the current yield curve inversion is unsustainable. If enough people were to withdraw physical cash, the system would have to book their losses and possibly recalling outstanding debts. This could be a life changing investment opportunity
Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence or consult your financial professional before making any investment decision.