[0:00] The Federal Reserve Bank just published
[0:02] their semianual banking system report
[0:04] card and they said that the US banking
[0:07] system looks good, but there are some
[0:09] things that they're worried about.
[0:10] Here's what they said. Quote, "The US
[0:12] banking system continues to maintain
[0:14] strong capital and liquidity levels, but
[0:17] there are three things that they're
[0:18] watching. Number one is private credit
[0:21] potential defaults. Number two are
[0:23] commercial real estate loan defaults.
[0:25] And number three, are banks sitting on
[0:28] large paper losses? So, in this video, I
[0:31] want to break down my analysis of what
[0:33] the Federal Reserve Bank just published
[0:35] in their semiannual banking system
[0:36] report, and then I want to go over some
[0:38] of their concerns. That way, you can
[0:40] understand what the Federal Reserve Bank
[0:41] is paying attention to. That way, you
[0:43] can be a smarter investor. So, let's
[0:45] break this all down. Now, the Federal
[0:47] Reserve Bank publishes the semiannual
[0:49] report where they take a look at how
[0:51] healthy banks are in the United States.
[0:53] And this has become more popular because
[0:55] of the banking crisis that we saw after
[0:58] the 2008 great financial crisis. And
[1:00] what the Federal Reserve Bank is taking
[1:02] a look at is number one, are banks
[1:05] making money and do they have cash in
[1:07] case of a downturn? And according to the
[1:09] Fed, 99% of banks in the United States
[1:12] today are quote well capitalized,
[1:15] meaning they have money in case there
[1:17] was a downturn. And then they went on to
[1:19] say that bank profits are healthy, which
[1:22] shows that banks in the United States
[1:24] are doing good. But then if you dig
[1:27] deeper into their analysis, which I'll
[1:28] also link for you down in the
[1:30] description, the Federal Reserve Bank
[1:31] then goes on to talk about three things
[1:33] that they are worried about. Number one
[1:35] is private credit. Let me read you what
[1:37] they said and then I'll break down what
[1:39] this means. The Federal Reserve closely
[1:42] monitors bank exposures to NDFIs,
[1:45] that is a non-depository financial
[1:48] institution, so private credit. Through
[1:51] regulatory data shows limited
[1:53] delinquencies in this category, several
[1:56] high-profile NDFI defaults have led to
[2:00] concerns about the private credit
[2:02] sector. Supervisory work shows that some
[2:05] banks are revisiting collateral
[2:08] management practices for these
[2:10] exposures. What that means is after the
[2:13] 2008 crash, there was this whole new
[2:16] industry called private credit. Because
[2:18] if you are a business and you wanted to
[2:20] borrow, let's say, $200 million, well,
[2:22] it might not be enough for some of these
[2:24] big banks, but it was too big for some
[2:26] of the smaller banks. And so, you were
[2:28] kind of in this weird market. And
[2:30] depending on what industry you were in,
[2:31] it might have been difficult for you to
[2:33] go out and raise a $200 million. That
[2:35] was when these private credit funds
[2:37] started, hedge funds said, "Oh, we can
[2:40] take advantage of this opportunity
[2:41] because these businesses need money.
[2:44] Banks are not lending them that money.
[2:46] How about we lend them that money at a
[2:48] high interest rate, 7 8 9 10%. It is a
[2:52] healthy return on our investment. the
[2:54] business gets the money that they want
[2:56] and we get to serve this market that was
[2:58] otherwise not being served. This then
[3:02] started what was called the private
[3:03] credit industry. Now the interesting
[3:05] thing about this, it's not a banking
[3:08] industry because these hedge funds are
[3:10] not banks. You and I can't go there and
[3:11] deposit money. They're just these
[3:13] investment institutions that are lending
[3:15] money. So they act like banks, but
[3:17] they're not actually banks.
[3:19] So because they're not banks, they're
[3:21] not regulated the way banks are. This is
[3:24] where things start to get really
[3:25] interesting because this industry
[3:27] started to boom. Hedge funds said, "Hey,
[3:29] we're making so much money on these
[3:31] private credit loans. You should invest
[3:33] in us." Talking to regular investors,
[3:35] talking to other banks, talking to other
[3:37] investment institutions, and everyone
[3:39] said, "Oh, you mean that you're going to
[3:41] pay out these 7 to 10% returns to us as
[3:44] the investor because you're going to
[3:46] charge these high interest rates and
[3:47] you're getting these loans paid? Okay,
[3:50] sign us up." So now wealthy people,
[3:53] non-wealthy people, investment
[3:55] institutions, pension funds, banks
[3:57] started investing into these private
[3:58] credit funds that were lending money to
[4:00] businesses at these very high interest
[4:02] rates. And that industry bmed for many
[4:05] years.
[4:07] But now things started to break. And
[4:09] they started to break for two reasons.
[4:11] Number one, interest rates started to go
[4:13] up a lot after 2022. The Federal Reserve
[4:16] Bank started raising interest rates. And
[4:18] these are not fixed rate loans. So now
[4:20] all of a sudden these businesses have
[4:22] these much higher interest rates, higher
[4:24] than they were before, and they're
[4:26] having a tougher time paying off because
[4:28] of the health of the economy. Reason
[4:31] number two is many of these companies
[4:33] were software companies and those same
[4:37] software companies were being hurt by AI
[4:39] because more and more people were
[4:40] saying, you know what, maybe we don't
[4:42] need this software because we can just
[4:44] use AI to build this tool instead of
[4:47] paying for that software. So these
[4:50] private credit companies that were
[4:52] relying on private credit loans started
[4:54] to hurt and not pay back their loans.
[4:56] And as they started to not pay back the
[4:58] loans, the private credit funds started
[5:00] to struggle. And the investors said, "We
[5:03] want to pull our money out because we're
[5:05] concerned about a default."
[5:07] Well, as investors try to pull their
[5:10] money out of these private credit funds
[5:11] because you were told that you could
[5:13] pull your money out whenever you want.
[5:15] It's kind of like a bank.
[5:17] investor tried to pull their money out
[5:18] and then the private credit funds said,
[5:20] "Uhoh, if we give the investors their
[5:23] money back, we're going to collapse. So
[5:25] then they froze your funds." They said,
[5:27] "You cannot have your money back." And
[5:29] this started happening with many of the
[5:31] largest investment funds out there.
[5:34] Blackstone froze funds, Black Rock froze
[5:37] funds, Blue Owl froze funds. I mean,
[5:40] many of the major Wall Street
[5:42] institutions started freezing funds
[5:44] because so many people wanted their
[5:45] money out. And now the Federal Reserve
[5:47] Bank is saying, well, this is a problem
[5:49] that's continuing. It's not a problem
[5:52] yet because nobody has collapsed, but we
[5:56] are concerned that this could become a
[5:58] problem. That's what the Federal Reserve
[6:00] Bank is saying because they said
[6:02] according to the Fed that this industry,
[6:04] this private credit industry is the
[6:06] fastest growing loan category at United
[6:10] States banks because it has doubled
[6:13] since 2021, 5 years.
[6:17] And not just that, according to the FDI,
[6:19] there are over $1 trillion in loans to
[6:22] these non-bank financial institutions.
[6:24] Meaning the banks, not the private
[6:27] credit funds, the banks on Wall Street
[6:30] have been lending money to the private
[6:31] credit funds to the tune of over a
[6:33] trillion dollars. And this has been a
[6:36] big growing trend amongst banks because
[6:38] they were getting these huge profits.
[6:40] But now they might be hurting because of
[6:42] what might be coming in the private
[6:44] credit industry. Again, we don't know
[6:46] what's going to happen. Maybe things
[6:48] will fix themselves, but if they don't,
[6:50] that could hurt the banking sector. And
[6:53] the question is what are they going to
[6:54] do if that happens? Because according to
[6:57] the Federal Reserve Bank, more and more
[6:59] of these banks and hedge funds are now
[7:03] looking at if these private credit funds
[7:06] collapse, how would we cover that loss?
[7:10] That's what the Federal Reserve Bank
[7:11] meant when they said that banks and
[7:14] these funds are now starting to revisit
[7:16] collateral management practices for
[7:19] their expenses. meaning if things go
[7:22] wrong, how are we going to cover that
[7:23] cost? So that's concern number one that
[7:25] the Federal Reserve Bank highlighted.
[7:27] Concern number two that they talk about
[7:29] is the commercial real estate sector.
[7:31] This is something that started after the
[7:34] pandemic and it has not fixed itself
[7:36] yet. Here's what the Fed said exactly.
[7:38] Quote, delinquencies on commercial real
[7:41] estate loans and consumer loans remain
[7:44] above the averages from the past decade,
[7:47] indicating in part that demand for
[7:49] office space has so far not returned to
[7:53] prepandemic levels. And this is
[7:55] primarily in the office and multif
[7:57] family sectors. What that means is that
[8:00] there's about $1.5 trillion in these
[8:03] commercial loans that a lot of people
[8:07] are underwater on. And this is what the
[8:09] Federal Reserve Bank is worried about
[8:11] because now as interest rates are
[8:14] continuing to stay high because a lot of
[8:16] people were hoping that they were going
[8:18] to fall in 2026,
[8:20] a lot of people are now having to pay
[8:22] their loans at higher rates. Why?
[8:25] Because these commercial real estate
[8:27] loans are not 30-year fixed rate
[8:29] mortgages, they're readjusting loans.
[8:32] And during the 2020 pandemic, everybody
[8:34] readjusted their loans. So 2020, 2021,
[8:37] 2022, everybody readjusted the loans.
[8:40] And many times it's like a 5-year loan,
[8:43] which means today in 2026, we have a big
[8:47] wave of readjustments coming. And people
[8:50] were hoping that their loans would
[8:52] readjust at a lower rate, but they're
[8:54] not. They were adjusting at high rates.
[8:58] Which means now if you own an office
[9:00] building and it's 75% occupied, 25%
[9:05] vacant,
[9:07] all of a sudden your cost of operating
[9:09] that building have gone up. If you have
[9:11] debt, not because of other costs, but
[9:14] because your debt has readjusted at a
[9:16] higher rate. In the past, what you would
[9:19] do as an office landlord is you now pass
[9:22] this cost down to your tenants by
[9:23] raising their rents. The problem is
[9:25] vacancies are still high in offices.
[9:28] People have gone back to work in the
[9:30] office, but it's not where we were pre-
[9:32] pandemic. And so, if you have to pass
[9:35] this cost down, the concern is what if
[9:37] people leave because you're still at a
[9:38] higher vacancy rate than before. And
[9:41] that's the concern now that we're
[9:43] starting to see this rise in commercial
[9:44] real estate defaults. it's higher than
[9:47] what the Federal Reserve Bank would like
[9:48] to see. And the question is, if interest
[9:51] rates stay higher for longer, these
[9:54] default rates could go up even more. And
[9:56] the question then is what is that going
[9:58] to mean for banks that are holding on to
[10:00] those loans? That's ultimately what the
[10:02] Fed is paying attention to because there
[10:04] are some of these smaller community
[10:06] regional banks that are holding on to
[10:08] these commercial real estate loans that
[10:10] might not be able to absorb huge
[10:12] commercial real estate losses. That's
[10:15] what the Fed is paying attention to,
[10:17] which now brings me to the Fed's third
[10:19] concern, which are paper losses at
[10:23] banks. And this goes back to what we saw
[10:26] happen a few years ago. If you remember
[10:28] Silicon Valley Bank, the reason why
[10:31] Silicon Valley Bank collapsed or one of
[10:33] the reasons why it's because when
[10:35] interest rates went down in 2020 and
[10:38] 2021,
[10:40] Silicon Valley Bank went out then and
[10:42] started saving their money in
[10:44] treasuries. A treasury is a loan to the
[10:47] United States government. It's
[10:49] considered the safest investment that
[10:51] you can make. So, Silicon Valley Bank
[10:53] bought these treasuries. Well, what
[10:55] happened was as interest rates started
[10:57] to go up, the value of those same
[11:00] treasuries started to go down, which is
[11:02] just how bonds work. A bond is a loan.
[11:05] As interest rates go up, the value of
[11:07] those loans go down.
[11:09] So now, Silicon Valley Bank was sitting
[11:11] on assets, these treasuries, which are
[11:13] now underwater. They paid X dollars for
[11:16] them. They're worth a fraction of that
[11:19] as interest rates went up. Well, some
[11:22] people got concerned and so the
[11:25] businesses that were saving their money
[11:27] in Silicon Valley Bank then started
[11:29] pulling their money out. As they started
[11:31] pulling their money out, it created a
[11:33] little bit of a run on the banks while
[11:36] Silicon Valley Bank did not have the
[11:38] assets to support it because well, they
[11:42] weren't planning on selling those
[11:43] treasuries. But then as people started
[11:44] pulling their money out, they needed
[11:46] more cash. So now they had to realize
[11:48] those losses and that's what then caused
[11:51] Silicon Valley Bank to ultimately
[11:53] collapse. And what the Federal Reserve
[11:55] Bank is saying is that that environment
[11:57] that's caused Silicon Valley Bank to
[11:58] collapse hasn't changed because a lot of
[12:02] banks were buying these treasuries
[12:04] during the 2020 2021 days when interest
[12:07] rates are very low and interest rates
[12:09] are a whole lot higher than we are today
[12:11] which means a lot of banks are sitting
[12:13] on these paper losses on their
[12:16] treasuries. According to the Fed is
[12:18] about $98 billion in paper losses.
[12:23] But the question is now if the banks
[12:25] start to feel more pain because of what
[12:28] we just talked about commercial real
[12:29] estate or private credit that could
[12:33] force some of the banks especially some
[12:35] of the more smaller regional community
[12:36] banks to try to liquidate some of their
[12:40] assets and that could be a problem if
[12:43] their assets they own are underwater.
[12:48] That's what the Federal Reserve Bank is
[12:49] paying attention to is that you need to
[12:51] pay attention and count these paper
[12:53] losses because they might be changing
[12:57] how you can measure these paper losses.
[13:01] In March 2026 this year, the Fed
[13:04] proposed a new rule that would require
[13:07] certain large banks to reflect these
[13:10] unrealized gains and losses on their
[13:14] financial statements.
[13:16] If that were to happen now, all these
[13:19] banks that are sitting on these cryp
[13:20] losses will then have to show that we
[13:23] are losing money on these things,
[13:26] that's where it could cause more
[13:28] problems because then more people would
[13:29] say, "Oh, this bank is in very bad
[13:31] financial health because it's underwater
[13:34] on these losses and they'd be forced to
[13:35] report it in a different way." Again, we
[13:38] don't know if that's going to happen,
[13:39] but this is a proposal that the Federal
[13:41] Reserve Bank made in March 2026,
[13:44] and that could change the health of some
[13:46] of these banks if now they have to
[13:47] disclose that they're in a much worse
[13:49] financial situation than many people
[13:51] thought that they were in. And then we
[13:53] have the most interesting part of this
[13:55] report, which is the end, where the
[13:57] Federal Reserve Bank talked about their
[13:59] concerns about private credit. They
[14:01] talked about their concerns about
[14:02] commercial real estate. They talked
[14:03] about their concerns about these paper
[14:05] losses. The Federal Reserve Bank then
[14:07] says that they are now thinking about
[14:09] loosening regulations and loosening some
[14:12] of their supervision on their banks
[14:14] despite their concerns. What they said
[14:16] in October 2025 is that the Fed is now
[14:19] telling their department to deprioritize
[14:24] procedural shortcomings
[14:27] and they should only focus on them when
[14:29] there are significant threats. Meaning
[14:31] if there are these concerns about
[14:33] potential defaults, there are these
[14:34] concerns about this potential paper
[14:36] losses, they should depprioritize them
[14:39] unless there is a significant threat.
[14:41] Now, the interesting thing about that is
[14:43] you're not going to know if it's a
[14:44] significant threat until after the
[14:46] threat has happened. So, the idea of
[14:48] trying to deprioritize them kind of
[14:50] defeats that same purpose, but you can
[14:51] start to see how things are changing.
[14:53] Well, then this year in February 2026,
[14:56] the Fed launched a review of every
[14:59] outstanding supervisory finding at every
[15:02] bank and they started closing and
[15:04] downgrading them. Meaning, the Fed's
[15:08] supervisory department was then being
[15:10] shut down to start not allocating money
[15:13] and time to reviewing some of these bank
[15:16] health documents. And then most
[15:20] recently, the Fed changed their
[15:22] definition of a quote well-managed bank.
[15:27] Here's what the Fed said. Quote, the
[15:29] proportion of large financial
[15:30] institutions considered well-managed
[15:33] increased based on the revised
[15:36] definition.
[15:37] Meaning, according to the Federal
[15:39] Reserve Bank, a lot of banks now in the
[15:41] United States are well-managed. Why?
[15:44] Because we changed the definition of
[15:45] well-managed. We made it easier for
[15:47] banks to qualify as well-managed. One of
[15:49] the things that I've learned in life is
[15:51] that oftentimes the things you don't pay
[15:52] attention to end up mattering the most.
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[17:04] description. What the Federal Reserve
[17:05] Bank said is, "Banks in the United
[17:07] States are healthy. They're well
[17:08] capitalized and they're making high
[17:10] profits. But we have three concerns.
[17:12] Those concerns are number one, private
[17:14] credit defaults. Number two, commercial
[17:16] real estate defaults. And then banks
[17:18] being underwater on their loans. Now,
[17:21] despite those concerns, we the Federal
[17:23] Reserve Bank are going to stop
[17:26] supervising the banks as tightly as we
[17:28] did before because we feel like it is a
[17:30] burden for the banking industry. So, we
[17:33] are going to stop doing that unless
[17:35] there is a significant threat and we're
[17:38] going to make it easier for banks to be
[17:40] able to operate their businesses and not
[17:42] necessarily oversee some of the things
[17:43] that they're doing to make it easier for
[17:45] banks to operate. The idea being
[17:47] hopefully banks can make more money. The
[17:49] concern is if something's a problem, it
[17:52] might not get caught until later. If you
[17:54] got value out of this video, the best
[17:56] thank you as a referral. If you could
[17:57] please share this video with a friend,
[17:58] family member, colleague, or fellow
[18:00] investor. That way we can continue to
[18:01] spread this type of financial education.
[18:03] Thank you. The United States is about to
[18:05] borrow $2 trillion to keep our economy
[18:08] running. It sounds great at first
[18:09] because it's going to stimulate our
[18:11] economy. But anytime the government
[18:13] spends money it doesn't have, somebody
[18:15] has to pay the price. I call this a
[18:18] hidden tax because this is not a tax
[18:20] that you're paying to the IRS. It's a
[18:22] tax you're paying with more expensive