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As I reported in my previous articles, the Federal Deposit Insurance Corp. determines bank solvency. These are the guidelines:
"To receive this benefit (Fed Deposit Insurance), member banks must follow certain liquidity and reserve requirements. Banks are classified into five groups according to their risk-based capital ratio:
Well capitalized: 10% or higher
Adequately capitalized: 8% or higher
Undercapitalized: less than 8%
Significantly undercapitalized: less than 6%
Critically undercapitalized: less than 2%
When a bank becomes undercapitalized the FDIC issues a warning to the bank. When the number drops below 6% the FDIC can change management and force the bank to take other corrective action. When the bank becomes critically undercapitalized the FDIC declares the bank insolvent and can take over management of the bank." (Source)
I will focus on those banks that have the highest potential for default in the next few articles. You will see that they are quite revealing, and totally discredit the recent "Stress Test" released by the Federal Reserve.
Zions Bank: Current Tier 1 capital ratio: 9.53%- Under Basel III: 7.90%
Zions Bank is one of the companies that makes up the S&P 500. It also still owes $1.4 billion to the US government Troubled Asset Relief Program. With assets est. at 53 billion, and liabilities at close to 46 billion (Source), it is one of the top two debtors to TARP.
The Bank's stock has been punished, trading at $21 per share. According to the companies Financial Report, the bank is still exposed to great risk:
Risk 1: "The Company has been and could continue to be negatively affected by adverse economic conditions."
...adverse economic conditions have negatively affected, and are likely to continue for some time to adversely affect, the Company’s assets, including its loans and securities portfolios, capital levels, results of operations, and financial condition...Any increase in the severity or duration of adverse economic conditions, including a double-dip recession or delay a full economic
recovery, would adversely affect the Company. (Source)
Risk 2: "We have been unprofitable in two of the last three years and could potentially be unprofitable in the future.."
"We and certain of our subsidiaries have been unprofitable during the two of the last three annual reporting periods. During the last three years, the non-cash accelerated discount amortization expense caused by subordinated debt holders converting their debt to preferred stock has contributed to our lack of profitability... (Ibid)
Risk 3: "The Dodd-Frank Act imposes significant new limitations on our business activities and subjects us to
increased regulation and additional costs."
• "Affect the levels of capital and liquidity with which the Company must operate and how it plans capital
and liquidity levels (including a phased-in elimination of the Company’s existing trust preferred
securities as Tier 1 capital);
• Subject the Company to new and/or higher fees paid to various regulatory entities, including but not
limited to deposit insurance fees to the FDIC;
• Impact the Company’s ability to invest in certain types of entities or engage in certain activities;
• Impact a number of the Company’s business and risk management strategies;
• Regulate the pricing of certain of our products and services and restrict the revenue that the Company
generates from certain businesses;
• Subject the Company to new capital planning actions, including stress testing or similar actions and
timing expectations for capital-raising;
• Subject the Company to the Consumer Financial Protection Bureau, with very broad rule-making and
• Grant authority to state agencies to enforce state and federal laws against national banks;
• Subject the Company to new and different litigation and regulatory enforcement risks; and
• Limit the amount and manner of compensation paid to executive officers and employees generally."(ibid)
Risk 4: "Economic and other circumstances, including pressure to repay CPP preferred stock, may require us to
raise capital at times or in amounts that are unfavorable to the Company."
"In 2008, we issued shares of preferred stock and a warrant to purchase shares of the Company’s common stock to the U.S. Treasury for $1.4 billion under TARP. There may be increasing market, regulatory or political pressure on the Company to raise capital to enable it to repay the preferred stock issued to the U.S. Treasury under TARP at a
time or in amounts that may be unfavorable to the Company’s shareholders." (Ibid)
Risk 5:"Credit quality has adversely affected us and may continue to adversely affect us."
Credit risk is one of our most significant risks. Although most credit quality indicators continued to improve
during 2011, the Company’s credit quality may continue to show weakness in some loan types and markets in
which the Company operates in 2012 as the economic recovery progresses. (Ibid)
Risk 6: "Weakness in the economy and in the real estate market.."
Credit exposure is one of our most significant risks. The Company’s level of problem credits remained relatively high as of December 31, 2011. The deterioration in credit quality that started in the latter half of2007 has most significantly affected the construction and land development segment of our portfolio. Although virtually all of our markets and lending segments have been adversely affected by the economic recession, the distress has been mostly concentrated in construction and land development loans in the Southwest states (generally, Arizona, California, and Nevada), which markets have been particularly adversely affected by job losses, declines in residential and commercial sale volumes and real estate values, and declines
in new construction activity.
Risk 7: "Our ability to maintain required capital levels and adequate sources of funding and liquidity has been and
may continue to be adversely affected by market conditions."
We are required to maintain certain capital levels in accordance with banking regulations and any capital requirements imposed by our regulators. We must also maintain adequate funding sources in the normal course of business to support our operations and fund outstanding liabilities. Our ability to maintain capital levels, sources of funding, and liquidity has been and could continue to be impacted by changes in the capital markets in which we operate and deteriorating economic and market conditions.
Risk 8: "The quality and liquidity of our asset-backed investment securities portfolio has adversely affected us and
may continue to adversely affect us."
The Company’s asset-backed investment securities portfolio includes CDOs collateralized by trust preferred securities issued by bank holding companies, insurance companies, and REITs that may have some exposure to construction loan, commercial real estate, and the subprime markets and/or to other categories of distressed assets. In addition, asset-backed securities also include structured asset-backed CDOs (also known as diversified structured finance CDOs) which have exposure to subprime and home equity mortgage securitizations.
Risk 9: We and/or the holders of our securities could be adversely affected by unfavorable rating actions from rating agencies.
Our ability to access the capital markets is important to our overall funding profile. This access is affected by the ratings assigned by rating agencies to us, certain of our affiliates, and particular classes of securities that we and our affiliates issue. The interest rates that we pay on our securities are also influenced by, among other things, the credit ratings that we, our affiliates, and/or our securities receive from recognized rating agencies.
The above article only lists some of the risks. The rest can be found here.
Zions Bancorp is one of the largest banks in the United States. With one of the greatest risks for insolvency. Yet, the entire industry faces most of the same risks as Zions. This is the major reason why I recommend using banks only for your short-term savings and checking. When it comes to mid-term or long-term savings, precious metals are a much better way to preserve your wealth from the coming bank collapses.