On The Run ..
A spate of recent bank collapses may have spooked you. Generally speaking, as a normal investor, there is little cause for alarm .. so far.
Olden timey movies like “Mary Poppins” and “It’s A Wonderful Life” depict a run on the bank as a physical scuffle between lots of old men to try and get as many dollar bills as possible from frightened bank tellers.
Things have changed and showing up at a branch is no longer the most efficient way to get your money out quickly. It’s important to understand what a run on the bank means in 2023. Why did all this happen?
Put simply .. Some banks grew quickly and massively with large influxes of often crypto-related and venture capital (VC) money, brought about mostly by a free-money, zero-interest rate environment and whole crypto bubble inflating in an entirely unregulated climate. The banks had to put all these deposits somewhere and (rather inexplicably) some decided that long term bonds that paid low but secure interest would be the best place.
As interest rates (predictably, it must be said) started soaring in early 2022, the inverse relationship between bond prices and interest rates kicked in, meaning that the value of these bonds plummeted. Long term bonds are highly sensitive to interest rate changes in a way that short term bonds are not. This is not normally a problem as long as the bank is not forced to sell the bonds at these low prices and can hold them for a long period of time, maybe even to maturity.
However, when the value of their bond portfolios slipped below the value of their interest and principal obligations, this became a huge problem as already high-interest-rate damaged customers began pulling money out upon learning this news, forcing the banks to liquidate their bonds at huge losses in order to meet withdrawal obligations.
Starting with Silvergate, then Silicon Valley Bank (SVB) and then Signature Bank, the dominoes began to fall last week. Others could follow in the resulting contagion, we are already seeing the stock prices of a number of regional banks come under a lot of pressure.
This is definitely a problem for employees who face redundancy and stockholders and bondholders who face potential wipeout. However, in the case of SVB and Signature at least, depositors appear to be protected from loss (Silvergate customers are in a somewhat different situation as it is technically a voluntary self-liquidation and has not yet been seized by regulators).
The Federal Deposit Insurance Corporation (FDIC) guarantees any deposits in its regulated banks up to $250k, which means that most ordinary people with accounts at these banks will be likely made whole pretty much right away. For those who have more than $250k at SVB and Signature, the FDIC has announced that cash deposits will be repaid to depositors 100% in full.
Unless significant contagion breaks out, the vast majority of individual investors should be financially unaffected by these developments. The world is a very different place than it was in 2007 and 2008 and media comparisons of the current situation to that era are lazy and misleading.
These things generally happen because of a lack of adequate risk management or regulation - or, in the case of crypto, lack of any regulation at all. One of the silver linings to come out of all this will hopefully be a healthy review of risks and levels of regulatory oversight and a beefing up where required.
Obviously, I will keep readers in touch with how I see things developing in my weekly market report every Sunday.
Anglia Advisors clients are welcome to reach out with any questions.
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