Is There A Problem In The Banking System?

September 29, 2019

Karl Eggerss was on CBS this morning with Sharon Ko discussing the recent intervention in the banking system by the Federal Reserve.  Is it a sign of bigger things and problems to come?

Karl Eggerss:                      … Bottom line is these banks had a shortage of cash and you go, “Oh my gosh, what is going on with the banks?” Keep in mind, after the financial crisis, which was a lot of banks had issues in the financial crisis, to try to prevent that from happening in the future, they require banks have a lot of regulations. So they require them to keep more money in the banks now than they ever have, so they’re very heavily regulated. So the banks literally have to keep so much sitting around.

Karl Eggerss:                      So I’ll give you an example. Let’s say somebody has a check that they need to write for $2,000 and they only have a thousand in their checking account. They don’t have enough money to write that check, but they have 55,000 in their savings account. All they have to do is move the money over. That’s kind of what was happening. But the caveat is the regulations state that the bank may have to keep 50,000 at all times. So if I told you you have to keep 50,000 in your savings account, no matter what, you can’t use it. You have the money, you just can’t use it. That’s really what happened, so the banks had the money but they weren’t able to use it. So the fed comes in and saves the day, injects money into the banking system to make sure that money is still flowing properly where it needs to go.

Karl Eggerss:                      And there are several reasons why people were thinking, “Why is this happening now? Why are the banks short cash all of a sudden? Why did this come to a head recently?” And it’s primarily because of a few things that may have come together, and a lot of this was speculation, but some ideas that are floating around is that corporations have taxes to pay coming up, so they were withdrawing money out of the banks to go pay their taxes. Number two is a lot of people are refinancing right now. A lot of our viewers are probably buying a home or refinancing because interest rates are so low, so banks are lending the money out to go purchase a home or refinance. So the banks were short cash. And where do they have to do that? They go to the federal reserve and get the cash to replenish themselves.

Karl Eggerss:                      So a few other issues. Oil prices have been volatile. So there was several different things that may have led to a sudden shortage of cash for banks. But most people watching maybe thinking, “Oh my gosh, we haven’t seen stuff like this happen since the financial crisis. Are we going to have that again?” And my answer is probably not. This is more of a technical glitch and a shortage of money from one place to there. It’s like I had money in this pocket but I didn’t have enough in the other and I had to move it quickly.

Karl Eggerss:                      So having said all of that, I don’t think that this will be something that reverberates into the economy and causes something major. In fact, we didn’t see the stock market move very much. We didn’t see the bond market move very much. We didn’t see a lot of things move that normally would if this was a serious issue.

Sharon Ko:                         Do you think it puts into question just banks in general and how much money they have?

Karl Eggerss:                      I think for the viewers they’re probably wondering, is my bank safe? Because that was a big question in 2007 and eight, is my bank safe? And I think the banks are safer now than they were, but usually with regulation is it sometimes goes too far. We’re going to make them really safe and make sure that the banks have all these regulations so this doesn’t happen again, unfortunately this is the repercussions which is it’s too strict and the banks are trying to lend out, because that’s what they do, and they don’t have enough money sitting around to lend. And so that’s why there was this disruption, if you will.

Karl Eggerss:                      And probably what’s going to happen, and we’ve already seen this, is that the federal reserve is going to continue to put money into the banking system all the way through October just to make sure. So they’re kind of the shock absorber to the banking system right now.

Sharon Ko:                         As always, thank you to Karl Eggerss. We appreciate your time. If you’d like to get more information on Covenant, contact them through that number or website you see there on your screen.