Anti-cryptoeconomist Nouriel Roubini: “Most US banks are technically close to insolvency”

In a recent MarketWatch opinion piece, renowned economist Dr. Nouriel Roubini discusses the precarious situation facing investors and banks.

Nouriel Roubini has held the position of Professor Emeritus at the Stern School of Business, New York University, since 2021, having served as Professor of Economics from 1995 to 2021. In addition, he is the Managing Director of Roubini Macro Associates, LLC, a New York -based global macroeconomic consulting firm, and co-founder of Rosa & Roubini Associates, headquartered in London.

In 2018, Roubini called blockchain “a glorified Excel spreadsheet” and “one of the most overhyped technologies ever.” As for Bitcoin, as far back as 2014, he attacked it, calling it “a Ponzi scheme,” a “lousy” store of value, and “a conduit for criminal/illegal activities.”

He highlights that by the end of 2022, US banks’ unrealized losses on securities reached $620 billion, about 28% of their total capital ($2.2 trillion). Roubini also points out that the rise in interest rates has led to a decline in the market value of banks’ other assets, and when these factors are taken into account, US banks’ unrealized losses actually amount to $1.75 trillion, or 80% of their capital.

According to Roubini, the “unrealized” nature of these losses stems from the current regulatory regime, which allows banks to value securities and loans at face value rather than their true market value.

He claims that most American banks are technically close to insolvency:

“In fact, by the quality of their capital, most US banks are technically close to insolvency, and hundreds are already fully insolvent.“

Roubini explains that rising inflation reduces the true value of banks’ liabilities (deposits) by increasing their “deposit franchise,” an asset that does not appear on their balance sheets. He further states that this asset only exists if deposits remain with the banks as interest rates rise. However, experience from Silicon Valley Bank and other US regional banks reveals that deposits are not guaranteed. If depositors withdraw their money, the deposit franchise disappears, and unrealized losses on securities are realized when banks sell them to meet withdrawal requirements, leading to bankruptcy.

In his op-ed, Roubini also mentions the “deposit franchise” argument, which assumes that most depositors will keep their money in accounts that earn close to 0% interest rather than earn 4% or more in safe money market funds. However, he claims that depositors are not so complacent. The current flight of uninsured and even insured deposits is likely driven by both the pursuit of higher returns and concerns about deposit safety.

Roubini emphasizes that the interest rate sensitivity of deposits has returned after being a non-factor for the past 15 years. He suggests that banks took on predictable duration risk to increase net interest margins and criticizes regulators for not subjecting banks to stress tests to see how they would fare in a scenario of sharply rising interest rates.

Finally, Roubini argues that central banks face a trilemma due to recent adverse aggregate supply shocks, such as the COVID pandemic and the war in Ukraine. Achieving price stability through interest rate increases increases the risk of a hard landing, but also the additional risk of severe financial instability. He warns that central banks can “tilt out” to avoid an economic and financial fusion, which lays the foundation for a loosening of inflation expectations over time. Roubini urges everyone to prepare for the coming stagflationary debt crisis.

Last month, Roubini expressed his concerns about the risks associated with cryptocurrencies during a conversation with Stansberry Research’s Daniela Cambone. He stressed that the crypto market is very dangerous and full of fraud and criminals, and pointed out that the whole crypto house of cards seems to be collapsing. Roubini suggested that crypto is not the place to be if someone is seeking to preserve their wealth.

Roubini also mentioned the significant volatility of Bitcoin, noting that just over a year ago its value was around $69,000, but it has since fallen to between $19,000 and $20,000, losing around 80% of its value. He added that other top-10 cryptocurrencies had experienced even greater losses. Furthermore, Roubini highlighted the recent collapses of two major crypto banks, Silvergate and Signature Bank, which he claimed were involved in risky activities, putting depositor funds at risk.