What is Causing the New Banking Crisis?
The Banking Crisis, Bank Failures and Bailouts: What is Causing the New Banking Crisis?
The Banking Crisis, Bank Failures and Bailouts
What is causing the new banking crisis? Is it bad loans? No it isn’t bad loans this time. It was bad risk management and the interest rate crunch that delivered the blows this time. There are 3 issues that are causing bank failures right now, like the ones at Silicon Valley Bank and Signature Bank. First, lack of diversification. Silicon Valley Bank took deposits almost exclusively from Venture Capitalists and Start up companies. This is likely to cause these clients to have similar problems which could lead to a run on the bank when funds get short. Silicon Valley had made the unfortunate mistake to put ALL their depositor’s money into mortgage backed securities and treasury bonds. With inflation rising, this was a big mistake. The reason is that before inflation rose to 7%, mortgage backed securities and the 10 year bond were trading at around 3% and this is about where Silicon Valley Bank invested depositor funds. This is normally a safe haven, but anyone watching the interest climate would have known that this time that was a bad bet. The reason is that if one invests in a bond, they actually make money on it as rates go down. (they gain principle) If rates rise, nobody wants a bond that has a return of 3% if the Fed raises rates to 6% and this is exactly what happened and the bank did not nothing but sit on its hands, losing billions as the FED kept raising rates.
Traditional banks put depositor’s money into a number of different buckets, but mostly into mortgages. Silicon Valley and Signature Bank did none of this and they also gave out loans based upon political ideology agreement rather than on sound business models, another ill conceived practice. But what caused a run on the bank was frankly, TMI. SVB put out a wire that they had invested and lost depositor money in treasuries and that they were selling off those investments and that they were trying to raise capital to replace those deposits. Unfortunately, this spooked investors and there was a one day call of 42 Billion in withdrawals, making the bank insolvent since all of the money was tied up in bonds that could not be liquidated to stop the run on the bank. The unfortunate wording disclosed that depositor money was not at the bank but invested in investments that were losing money. This spooked depositors and thus a run on the bank. Remember, depositors assume that their money is at the bank, not invested somewhere else, but bank funds are always invested somewhere else, depositors just are not told that. This contagion is spreading in the banking world as rates continue to rise.
Even experienced Credit Suisse was not exempt from the rising interest rates environment which caused massive losses. Over the weekend, they were sold to USB for 2 billion dollars.
Ralph Migliozzi
Broker Originator Serving Northern California
NMLS 282851 DRE #01002038
(p) 530-330-3073
