Three banks have collapsed in just three days. Is this the beginning of the end?
Wow. Things are coming off the rails fast.
Last week – in the space of three days – we had three US banks go bust.
That’s Yuuugge.
First there was Silvergate – an almost entirely cypto-focused lender. With deposits of just $6bn at the end of 2022, this is reasonably small-fry.
But then came Sillicon Valley Bank (SVB). With deposits of $212bn, this guy is big. It’s the 16th biggest bank in America. Went it was forced into administration by authorities on Friday, it became the second biggest bank collapse in American history.
And then over the weekend, as contagion spread, Signature Bank in New York was also forced into administration. With deposits worth US$89bn, it’s a long way down the food chain from SVB, but it’s still substantial.
And so, at the time of writing, 3 banks have gone bust in just three days.
No wonder people are freaking out.
The US government has stepped in. Like Australia, America has a deposit guarantee scheme for deposits up to $250,000. So they’re safe. But the US Treasury has just announced that not only are all of those deposits safe, but the entire book is protected as well.
Shareholders and creditors are going to take a bath, but depositors are safe.
That’s a pretty huge call.
But the government didn’t have any choice.
Because if it left SVBs large depositors out to dry, then America would have woken up on Monday to the prospect of a run on every smaller regional bank.
And that, obviously, would have been carnage.
So they had to step in to stop the panic.
We’ll see if it works.
The interesting thing about this, and I’ve been saying this for a while, is that the Fed, and central banks around the world, will hike until they break something.
And last week, rising rates broke all three banks.
That’s because they had substantial assets tied up in Treasuries – fixed rate securities.
They purchased these when rates were at historic lows, but as rates rose, the value of these securities fell.
That’s not necessarily a problem. You can just hold them to maturity, and you just didn’t make as much money on them as you would have liked.
But if you’re forced to sell them, you have to sell them at a loss. And you lose big money.
And that’s what happened to our fateful trio. In the case of Silvergate, a crypto winter was forcing crypto firms to withdraw money, meaning they had to liquidate their treausries to pay them out.
For SVB, it was the Sillicon Valley tech start ups and venture capital firms that were also get smashed by a tech-winter.
And for Signature Bank, it was just fear that SVB wasn’t the only regional bank that was exposed.
But they all had to sell securities to pay out withdrawals. As they did that, they booked massive losses.
Until finally, they went bust.
As I’ve said, rising rates always breaks something.
That’s the point.
So far, we’re looking at a death toll of three small banks.
I don’t think the broader financial system is at risk. Larger banks have different regulatory requirements, and should be protected from the shrapnel that took out SVB et al.
But who knows where it shows up next? That’s the thing. Sh#t’s getting unpredictable.
For example, the Swedish pension fund giant Alecta was SVB’s fourth largest shareholder, and also had a substantial stake in Signature Bank.
So maybe Swedish pensioners are taking a bath.
You would never have predicted it.
But this is what happens when you raise rates aggressively (too aggressively).
Stuff just breaks.
JG.