The Fed Just Quietly Confirmed The Crisis Wall Street Hoped You Wouldn't Notice

[00:00] The Federal Reserve Bank just published

[00:02] their semianual banking system report

[00:04] card and they said that the US banking

[00:07] system looks good, but there are some

[00:09] things that they're worried about.

[00:10] Here's what they said. Quote, "The US

[00:12] banking system continues to maintain

[00:14] strong capital and liquidity levels, but

[00:17] there are three things that they're

[00:18] watching. Number one is private credit

[00:21] potential defaults. Number two are

[00:23] commercial real estate loan defaults.

[00:25] And number three, are banks sitting on

[00:28] large paper losses? So, in this video, I

[00:31] want to break down my analysis of what

[00:33] the Federal Reserve Bank just published

[00:35] in their semiannual banking system

[00:36] report, and then I want to go over some

[00:38] of their concerns. That way, you can

[00:40] understand what the Federal Reserve Bank

[00:41] is paying attention to. That way, you

[00:43] can be a smarter investor. So, let's

[00:45] break this all down. Now, the Federal

[00:47] Reserve Bank publishes the semiannual

[00:49] report where they take a look at how

[00:51] healthy banks are in the United States.

[00:53] And this has become more popular because

[00:55] of the banking crisis that we saw after

[00:58] the 2008 great financial crisis. And

[01:00] what the Federal Reserve Bank is taking

[01:02] a look at is number one, are banks

[01:05] making money and do they have cash in

[01:07] case of a downturn? And according to the

[01:09] Fed, 99% of banks in the United States

[01:12] today are quote well capitalized,

[01:15] meaning they have money in case there

[01:17] was a downturn. And then they went on to

[01:19] say that bank profits are healthy, which

[01:22] shows that banks in the United States

[01:24] are doing good. But then if you dig

[01:27] deeper into their analysis, which I'll

[01:28] also link for you down in the

[01:30] description, the Federal Reserve Bank

[01:31] then goes on to talk about three things

[01:33] that they are worried about. Number one

[01:35] is private credit. Let me read you what

[01:37] they said and then I'll break down what

[01:39] this means. The Federal Reserve closely

[01:42] monitors bank exposures to NDFIs,

[01:45] that is a non-depository financial

[01:48] institution, so private credit. Through

[01:51] regulatory data shows limited

[01:53] delinquencies in this category, several

[01:56] high-profile NDFI defaults have led to

[02:00] concerns about the private credit

[02:02] sector. Supervisory work shows that some

[02:05] banks are revisiting collateral

[02:08] management practices for these

[02:10] exposures. What that means is after the

[02:13] 2008 crash, there was this whole new

[02:16] industry called private credit. Because

[02:18] if you are a business and you wanted to

[02:20] borrow, let's say, $200 million, well,

[02:22] it might not be enough for some of these

[02:24] big banks, but it was too big for some

[02:26] of the smaller banks. And so, you were

[02:28] kind of in this weird market. And

[02:30] depending on what industry you were in,

[02:31] it might have been difficult for you to

[02:33] go out and raise a $200 million. That

[02:35] was when these private credit funds

[02:37] started, hedge funds said, "Oh, we can

[02:40] take advantage of this opportunity

[02:41] because these businesses need money.

[02:44] Banks are not lending them that money.

[02:46] How about we lend them that money at a

[02:48] high interest rate, 7 8 9 10%. It is a

[02:52] healthy return on our investment. the

[02:54] business gets the money that they want

[02:56] and we get to serve this market that was

[02:58] otherwise not being served. This then

[03:02] started what was called the private

[03:03] credit industry. Now the interesting

[03:05] thing about this, it's not a banking

[03:08] industry because these hedge funds are

[03:10] not banks. You and I can't go there and

[03:11] deposit money. They're just these

[03:13] investment institutions that are lending

[03:15] money. So they act like banks, but

[03:17] they're not actually banks.

[03:19] So because they're not banks, they're

[03:21] not regulated the way banks are. This is

[03:24] where things start to get really

[03:25] interesting because this industry

[03:27] started to boom. Hedge funds said, "Hey,

[03:29] we're making so much money on these

[03:31] private credit loans. You should invest

[03:33] in us." Talking to regular investors,

[03:35] talking to other banks, talking to other

[03:37] investment institutions, and everyone

[03:39] said, "Oh, you mean that you're going to

[03:41] pay out these 7 to 10% returns to us as

[03:44] the investor because you're going to

[03:46] charge these high interest rates and

[03:47] you're getting these loans paid? Okay,

[03:50] sign us up." So now wealthy people,

[03:53] non-wealthy people, investment

[03:55] institutions, pension funds, banks

[03:57] started investing into these private

[03:58] credit funds that were lending money to

[04:00] businesses at these very high interest

[04:02] rates. And that industry bmed for many

[04:05] years.

[04:07] But now things started to break. And

[04:09] they started to break for two reasons.

[04:11] Number one, interest rates started to go

[04:13] up a lot after 2022. The Federal Reserve

[04:16] Bank started raising interest rates. And

[04:18] these are not fixed rate loans. So now

[04:20] all of a sudden these businesses have

[04:22] these much higher interest rates, higher

[04:24] than they were before, and they're

[04:26] having a tougher time paying off because

[04:28] of the health of the economy. Reason

[04:31] number two is many of these companies

[04:33] were software companies and those same

[04:37] software companies were being hurt by AI

[04:39] because more and more people were

[04:40] saying, you know what, maybe we don't

[04:42] need this software because we can just

[04:44] use AI to build this tool instead of

[04:47] paying for that software. So these

[04:50] private credit companies that were

[04:52] relying on private credit loans started

[04:54] to hurt and not pay back their loans.

[04:56] And as they started to not pay back the

[04:58] loans, the private credit funds started

[05:00] to struggle. And the investors said, "We

[05:03] want to pull our money out because we're

[05:05] concerned about a default."

[05:07] Well, as investors try to pull their

[05:10] money out of these private credit funds

[05:11] because you were told that you could

[05:13] pull your money out whenever you want.

[05:15] It's kind of like a bank.

[05:17] investor tried to pull their money out

[05:18] and then the private credit funds said,

[05:20] "Uhoh, if we give the investors their

[05:23] money back, we're going to collapse. So

[05:25] then they froze your funds." They said,

[05:27] "You cannot have your money back." And

[05:29] this started happening with many of the

[05:31] largest investment funds out there.

[05:34] Blackstone froze funds, Black Rock froze

[05:37] funds, Blue Owl froze funds. I mean,

[05:40] many of the major Wall Street

[05:42] institutions started freezing funds

[05:44] because so many people wanted their

[05:45] money out. And now the Federal Reserve

[05:47] Bank is saying, well, this is a problem

[05:49] that's continuing. It's not a problem

[05:52] yet because nobody has collapsed, but we

[05:56] are concerned that this could become a

[05:58] problem. That's what the Federal Reserve

[06:00] Bank is saying because they said

[06:02] according to the Fed that this industry,

[06:04] this private credit industry is the

[06:06] fastest growing loan category at United

[06:10] States banks because it has doubled

[06:13] since 2021, 5 years.

[06:17] And not just that, according to the FDI,

[06:19] there are over $1 trillion in loans to

[06:22] these non-bank financial institutions.

[06:24] Meaning the banks, not the private

[06:27] credit funds, the banks on Wall Street

[06:30] have been lending money to the private

[06:31] credit funds to the tune of over a

[06:33] trillion dollars. And this has been a

[06:36] big growing trend amongst banks because

[06:38] they were getting these huge profits.

[06:40] But now they might be hurting because of

[06:42] what might be coming in the private

[06:44] credit industry. Again, we don't know

[06:46] what's going to happen. Maybe things

[06:48] will fix themselves, but if they don't,

[06:50] that could hurt the banking sector. And

[06:53] the question is what are they going to

[06:54] do if that happens? Because according to

[06:57] the Federal Reserve Bank, more and more

[06:59] of these banks and hedge funds are now

[07:03] looking at if these private credit funds

[07:06] collapse, how would we cover that loss?

[07:10] That's what the Federal Reserve Bank

[07:11] meant when they said that banks and

[07:14] these funds are now starting to revisit

[07:16] collateral management practices for

[07:19] their expenses. meaning if things go

[07:22] wrong, how are we going to cover that

[07:23] cost? So that's concern number one that

[07:25] the Federal Reserve Bank highlighted.

[07:27] Concern number two that they talk about

[07:29] is the commercial real estate sector.

[07:31] This is something that started after the

[07:34] pandemic and it has not fixed itself

[07:36] yet. Here's what the Fed said exactly.

[07:38] Quote, delinquencies on commercial real

[07:41] estate loans and consumer loans remain

[07:44] above the averages from the past decade,

[07:47] indicating in part that demand for

[07:49] office space has so far not returned to

[07:53] prepandemic levels. And this is

[07:55] primarily in the office and multif

[07:57] family sectors. What that means is that

[08:00] there's about $1.5 trillion in these

[08:03] commercial loans that a lot of people

[08:07] are underwater on. And this is what the

[08:09] Federal Reserve Bank is worried about

[08:11] because now as interest rates are

[08:14] continuing to stay high because a lot of

[08:16] people were hoping that they were going

[08:18] to fall in 2026,

[08:20] a lot of people are now having to pay

[08:22] their loans at higher rates. Why?

[08:25] Because these commercial real estate

[08:27] loans are not 30-year fixed rate

[08:29] mortgages, they're readjusting loans.

[08:32] And during the 2020 pandemic, everybody

[08:34] readjusted their loans. So 2020, 2021,

[08:37] 2022, everybody readjusted the loans.

[08:40] And many times it's like a 5-year loan,

[08:43] which means today in 2026, we have a big

[08:47] wave of readjustments coming. And people

[08:50] were hoping that their loans would

[08:52] readjust at a lower rate, but they're

[08:54] not. They were adjusting at high rates.

[08:58] Which means now if you own an office

[09:00] building and it's 75% occupied, 25%

[09:05] vacant,

[09:07] all of a sudden your cost of operating

[09:09] that building have gone up. If you have

[09:11] debt, not because of other costs, but

[09:14] because your debt has readjusted at a

[09:16] higher rate. In the past, what you would

[09:19] do as an office landlord is you now pass

[09:22] this cost down to your tenants by

[09:23] raising their rents. The problem is

[09:25] vacancies are still high in offices.

[09:28] People have gone back to work in the

[09:30] office, but it's not where we were pre-

[09:32] pandemic. And so, if you have to pass

[09:35] this cost down, the concern is what if

[09:37] people leave because you're still at a

[09:38] higher vacancy rate than before. And

[09:41] that's the concern now that we're

[09:43] starting to see this rise in commercial

[09:44] real estate defaults. it's higher than

[09:47] what the Federal Reserve Bank would like

[09:48] to see. And the question is, if interest

[09:51] rates stay higher for longer, these

[09:54] default rates could go up even more. And

[09:56] the question then is what is that going

[09:58] 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

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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