{"id":11684,"date":"2010-08-03T12:45:57","date_gmt":"2010-08-03T16:45:57","guid":{"rendered":"http:\/\/countingpips.com\/fx\/?p=11684"},"modified":"2010-08-03T12:45:57","modified_gmt":"2010-08-03T16:45:57","slug":"stress-test-how-to-find-the-safest-banks-in-the-u-s-and-abroad","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/fx\/2010\/08\/03\/stress-test-how-to-find-the-safest-banks-in-the-u-s-and-abroad\/","title":{"rendered":"Stress Test: How to Find the Safest Banks in the U.S. and Abroad"},"content":{"rendered":"

By Elliott Wave International<\/span><\/h3>\n

Stress test results for the biggest European banks were recently released, while the largest U.S. banks took their first stress tests in May 2009. But most people don’t really care how much stress their banks are under; they are more worried about their own stress levels. One thing that adds to personal stress is worrying about whether their deposits are in a safe place. Bob Prechter has encouraged people to find the safest banks for their money since he originally wrote his New York Times best-selling book, Conquer the Crash: You Can Survive and Prosper in a Deflationary Depression<\/em> in 2002.<\/em> This excerpt explains why banks of all sizes are riskier than they used to be (think about portfolios stuffed with derivatives, emerging market debt and non-performing commercial loans). You can also get a list of the Top 100 Safest U.S. Banks — two banks per state — that was just updated in late June with the latest available data by joining Club EWI and receiving EWI’s Safe Banks report<\/a>.<\/span><\/strong><\/p>\n

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\nExcerpted from Conquer the Crash: You Can Survive and Prosper in a Deflationary Depression,<\/em> by Robert Prechter<\/p>\n

Many major national and international banks around the world have huge portfolios of \u201cemerging market\u201d debt, mortgage debt, consumer debt and weak corporate debt. I cannot understand how a bank trusted with the custody of your money could ever even think<\/em> of buying bonds issued by Russia or Argentina or any other unstable or spendthrift government. As At the Crest of the Tidal Wave<\/em> put it in 1995, \u201cToday\u2019s emerging markets will soon be sub<\/em>merging markets.\u201d That metamorphosis began two years later. The fact that banks and other investment companies can repeatedly ride such \u201cinvestments\u201d all the way down to write-offs<\/em> is outrageous.<\/p>\n

Many banks today also have a shockingly large exposure to leveraged derivatives such as futures, options and even more exotic instruments. The underlying value of assets represented by such financial derivatives at quite a few big banks is greater than the total value of all their deposits. The estimated representative value of all derivatives in the world today is $90 trillion, over half of which is held by U.S. banks. Many banks use derivatives to hedge against investment exposure, but that strategy works only if the speculator on the other side of the trade can pay off if he\u2019s wrong.<\/p>\n

Relying upon, or worse, speculating in, leveraged derivatives poses one of the greatest risks to banks that have succumbed to the lure. Leverage almost always<\/em> causes massive losses eventually because of the psychological stress that owning them induces. You have already read of the tremendous debacles at Barings Bank, Long-Term [sic] Capital Management, Enron and other institutions due to speculating in leveraged derivatives. It is traditional to discount the representative value of derivatives because traders will presumably get out of losing positions well before they cost as much as what they represent. Well, maybe. It is at least as common a human reaction for speculators to double their bets when the market goes against a big position. At least, that\u2019s what bankers might<\/em> do with your<\/em> money.<\/p>\n

Today\u2019s bank analysts assure us, as a headline from The Atlanta Journal-Constitution<\/em> put it on December 29, 2001, that \u201cBanks [Are] Well-Capitalized.\u201d Banks today are indeed generally considered well capitalized compared to their situation in the 1980s. Unfortunately, that condition is mostly thanks to the great asset mania of the 1990s, which, as explained in Book One, is probably over. Much of the record amount of credit that banks have extended, such as that lent for productive enterprise or directly to strong governments, is relatively safe. Much of what has been lent to weak governments, real estate developers, government-sponsored enterprises, stock market speculators, venture capitalists, consumers (via credit cards and consumer-debt \u201cinvestment\u201d packages), and so on, is not. One expert advises, \u201cThe larger, more diversified banks at this point are the safer place to be.\u201d That assertion will surely be severely tested in the coming depression.<\/p>\n

There are five major conditions in place at many banks that pose a danger: (1) low liquidity levels, (2) dangerous exposure to leveraged derivatives, (3) the optimistic safety ratings of banks\u2019 debt investments, (4) the inflated values of the property that borrowers have put up as collateral on loans and (5) the substantial size of the mortgages that their clients hold compared both to those property values and to the clients\u2019 potential inability to pay under adverse circumstances. All of these conditions compound the risk to the banking system of deflation and depression.<\/p>\n

Financial companies are enjoying big advances in the current stock market rally. Depositors today trust their banks more than they trust government or business in general. For example, a recent poll asked web surfers which among a list of seven types of institutions they would most trust to operate a secure identity service. Banks got nearly 50 percent of the vote. General bank trustworthiness is yet another faith that will be shattered in a depression.<\/p>\n

Well before a worldwide depression dominates our daily lives, you will need to deposit your capital into safe institutions. I suggest using two or more to spread the risk even further. They must be far better than the ones that today are too optimistically deemed \u201cliquid\u201d and \u201csafe\u201d by both rating services and banking officials.<\/p>\n

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Inside the revealing free report, you’ll discover:<\/p>\n