Bank Troubles

It shot out from the left side of the road and hit me before I could even hit my brakes. I was driving one night years ago on a two-lane road when a whitetail deer jumped a fence out of nowhere and hit me broadside. I almost wrecked, not because of the collision but because it scared me so much. The suddenness of it reminds me of the bank failures in the past few days. They came out of nowhere and broadsided us.

The failure of four banks in the last two weeks, including Silicon Valley Bank, Signature Bank (crypto-focused), Credit Suisse (an international bank saved by the Swiss), and First Republic (currently in the news as I write). For many of us, these headlines have brought back painful memories of the financial crisis 15 years ago when Bear Stearns and Lehman Brothers collapsed. But this isn’t 2008, and I don’t see history repeating itself.

This time, credit risk isn’t the problem; it’s an interest rate risk. In 2008 banks were holding near worthless subprime mortgages, but today’s banks are holding the safest investments in the world, U.S. Treasury and Agency mortgage-backed securities. The Federal Reserve’s aggressive rate-rising interest rates policy made the banks’ bonds lose value.

The Fed hurt Silicon Valley Bank, the biggest of the four banks, but its management made mistakes. They took risks when rates were low and seemingly ignored the rising rates happening at their fastest pace in decades. As rates quickly rose, their customers, which were a lot of startup companies, could no longer afford to borrow and instead started withdrawing their bank deposits. The number one rule in banking is that the bank’s assets must match deposits. If your customers are prone to withdraw lots of cash, then using their money to buy long-term bonds will never work.

The four biggest U.S. deposit banks – Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo – remained relatively calm. I don’t think the whole U.S. banking system is at risk. I haven’t and don’t plan to take any money out of my bank.

I’m not scared of bank stocks and think there will eventually be buying opportunities in that sector. I’m not a buyer of U.S. banks yet, but I will give them a good look when they have begun restoring customer confidence.

We may see more market volatility than we want in the coming weeks, but this is not another 2008. A big reason is that commercial banks have four and a half times more cash cushion to tolerate losses than at the start of the financial crisis, according to LPL. So longer-term investors with a well-balanced allocation shouldn’t make any changes at this point.

The deer bounced off my car and stumbled into the ditch. I stopped my car and went back to where it hit me, and the deer jumped up and ran off. In the end, he was hurt more than my car. As it turned out, the biggest risk I had was overreacting. Overreacting might be the biggest risk during this strange bank scare as well.

Have a blessed week!


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