Is Your Money Safe in the Bank?

Have you been listening to the news?

Is it filling you with anxiety?

Are you worried about the money in your bank?

Source: Reuters

Well, it’s completely natural to have these concerns, given the turmoil we’ve seen in American banking this past week.

Yes, generally speaking, in a higher interest-rate environment, there is elevated risk. There is also the potential of contagion across the banking sector.

But here’s the big question: is the mainstream media overselling the fear? Are they leading you astray?

Short answer: yes.

Here’s something the journalists aren’t telling you. As of March 1, 2023, the total assets held by commercial banks in America is $22.86 trillion:

• To put this into context, Silicon Valley Bank [NASDAQ:SIVB] has $212 billion worth of assets — which comes up to 0.9% of the industry total.

• Meanwhile, First Republic Bank [NYSE:FRC] also has $212 billion worth of assets — which comes up to 0.9% of the industry total.

• Signature Bank [NASDAQ: SBNY] has $111 billion worth of assets — which comes up to 0.5% of the industry total.

• Finally, Silvergate Bank [NYSE:SI] has $11 billion worth of assets — which comes up to 0.05% of the industry total.

So, do the sums. You will find that the total risk exposure represented by these banks only comes up to 2.35%. That’s incredibly miniscule, considering all the fuss that’s been thrown up. Why is everyone so eager to make a mountain out a molehill? Well, let’s look critically at this situation:

• ‘If it bleeds, it leads.’ This has been the motto of the mainstream media since forever. And in this age of 24/7 media and breaking news, they will report on every drop of blood. Magnify it. Amplify it.

• There’s an apocryphal quote by Mark Twain which sums up this situation perfectly: ‘A lie can travel half way around the world while the truth is putting on its shoes.’

• It appears that emotion, rather than common sense, has taken over the headlines.

Of course, that’s not to say that actual damage hasn’t been done. The speculative-tech sector — especially cryptocurrency — has been hit hard. Markets Insider explains why:

Crypto is facing a banking problem, with three of the industry’s crucial financial partners shuttering in the past week.

 

Silicon Valley Bank, Silvergate Capital, and Signature all closed, and each had distinct ties to the trillion-dollar market. 

 

Crypto-friendly venture capital funds and digital asset firms held cash with SVB, which is now the second-largest bank failure in history. Circle, the company behind the number 2 stablecoin USDC, holds $3.3 billion in cash reserves with the now-fallen bank. 

 

Silvergate, which served crypto clients like Coinbase and Kraken, also closed after a prolonged drop in customer deposits that began last year, along with a slew of other financial issues. And on Sunday, Signature was seized by regulators after concerns that the banking crisis would spread. 

Katie Porter, a congresswoman representing California, has some acidic words for Silicon Valley Bank:

‘There are real questions about why the bank didn’t anticipate one of the most fundamental financial facts that everybody should know, which is interest rates go up and they go down. You can’t bet on them staying low forever.’

This begs the question: how exactly did we get to this point? How did Silicon Valley Bank and its peers get into trouble?

• Well, let’s face it: no one likes regulation and compliance. Lest of all the banking industry.

• This is why, in 2018, the industry lobbied President Trump. And he signed a new law into power to deregulate the capital requirements for small and midsize banks.

• But did this create a moral hazard? Did it encourage these banks to take on more risk than they should have?

• Silicon Valley Bank is the perfect case study here. During the pandemic of 2020, it enjoyed a big inflow of deposits. It had more cash than it knew what to do with — so it invested them in US Treasury securities. This seemed like a smart move at the time.

• Unfortunately, in 2022, rising interest rates meant that the bonds quickly declined in value. Eventually, the bank had no choice but to sell them, crystallising a $1.8 billion loss.

• On March 8, CEO Greg Becker revealed that the bank planned to raise $2.25 billion in capital in order to cover this loss. This revelation immediately sparked a breakdown in customer confidence. Rumours and scaremongering took over. Suddenly, everyone wanted to rush for the exit.

• On March 9, there was a stampede of withdrawals, to the tune of $42 billion. The bank’s stock price plummeted over 60%.

• On March 10, government regulators had to step in to take control.

• Is this irrational? Crazy? Especially given that the $1.8 billion loss was relatively tiny to begin with?

Socialist-minded Democrats are certainly pouncing on this issue now. Here’s what NBC News has to say:

Sen. Bernie Sanders, I-Vt., who also opposed the 2018 law, blamed it for Silicon Valley Bank’s collapse.

 

“Let’s be clear. The failure of Silicon Valley Bank is a direct result of an absurd 2018 bank deregulation bill signed by Donald Trump that I strongly opposed,” he said in a statement. “Five years ago, the Republican Director of the Congressional Budget Office released a report finding that this legislation would ‘increase the likelihood that a large financial firm with assets of between $100 billion and $250 billion would fail.’”

Yes, there will be losers during this banking meltdown. But don’t forget that there will also be winners:

• HSBC [LON:HSBA], which is the largest bank in the United Kingdom, has decided to swoop in, vulture-style.

• It has acquired the British arm of the Silicon Valley Bank for — drum roll, please — the princely sum of £1.

• The media is portraying HSBC as a shining white knight for bailing out British tech companies. But, really, this is just good old-fashioned capitalism at work. HSBC clearly benefits by capturing distressed assets on the cheap.

• In the words of Baron Rothschild from the 18th century: ‘Buy when there’s blood in the streets, even if the blood is your own.’

So, here are some key lessons to bear in mind:

• This is not the end of the world, despite what the media might claim. This is simply the next stage in the cycle.

• Don’t forget: it was Covid-era lockdowns and money printing that created a buoyant environment for speculative tech and crypto to flourish. But it was irrational and short-lived. Interest rates must now ‘normalise’, which is why we’re seeing a healthy correction.

• Incompetent players in the industry — like Silicon Valley Bank and its peers — must be flushed out, and rightfully so. Meanwhile, the more efficient players will consolidate and strengthen themselves.

Source: Investopedia

Is there light at the end of the tunnel? Well, yes:

• Prior to the collapse of these banks, Jerome Powell and the Federal Reserve were potentially looking at a 50 basis-point hike to the fed funds rate on March 22.

• However, given the recent ruckus, this plan may be put on ice. It’s now looking possible that we may just get 25 basis points instead.

Still, there are additional concerns brewing outside the United States:

• On March 14, Credit Suisse [SWX:CSGN] — a bank in Switzerland with $574 billion in assets at the end of 2022 — stirred up worry.

• This bank is no stranger to controversy. Since 2009, it has experienced eight major scandals. The latest one happened this week, when the bank revealed that it had booked in a $8 billion net loss in 2022. It also admitted that it had uncovered ‘material weakness’ in its financial reporting over the last two years.

• In response, Ammar Al Khudairy, the chairman of the Saudi National Bank — which is Credit Suisse’s largest shareholder — said that he would ‘absolutely not’ invest any further money in Credit Suisse.

• This emotional outburst led to a customer run on Credit Suisse on March 15. And the bank’s stock price plunged by as much as 30%.

• Fortunately, regulators from the Swiss National Bank — the country’s central bank — quickly stepped in. They offered Credit Suisse a lifeline in the form of a liquidity backstop: a loan of up to $54 billion. This has been described as ‘decisive action’ to calm the jittery mood.

• Apparently expressing regret, Ammar Al Khudairy of the Saudi National Bank has since softened and clarified his earlier remarks. He says that the panic was ‘unwarranted’ to begin with. He calls the issue an ‘isolated incident’.

• On March 16, investors embraced the news and became bullish. The Credit Suisse stock price rocketed as high as 27%.

• Is this a bizarre turn of events? Well, yeah, absolutely. To me, it almost feels like a slapstick comedy of errors.

• Don’t forget Hanlon’s razor: ‘Never attribute to malice that which is adequately explained by stupidity.’

Look beyond the noise

So, right now, here’s what you need to think about:

• Is the fear overdone?

• Is it actually creating pockets of value in the market?

• Are there quality assets that are now available at discounted prices?

• Are you contrarian enough to consider your next move?

• Are you courageous enough to make a decision?

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Regards,

John Ling

Analyst, Wealth Morning

(This article is general in nature and should not be construed as any financial or investment advice.)