The banking crisis, which became visible to most Americans only with the sudden and unexpected collapse of Silicon Valley Bank two weeks ago today, has not abated. There are reasons to believe it is going to get worse. So, what should one do to get out of harm’s way? Is it possible to find shelter in the financial storm?
The past few weeks have seen the collapse of not only Silicon Valley Bank, but of Silvergate Bank and Signature Bank, as well as the emergency rescue of First Republic Bank by a consortium of eleven of the “too-big-to-fail” (TBTF) banks, which collectively placed $30 billion of deposits with First Republic after some $70 billion of customer deposits fled from the bank in just a few days. Collectively, these troubled banks held over $500 billion in assets before their demise, and two of them (SVB and First Republic) were amongst the top twenty largest banks in the United States. This is serious.
The U.S. financial regulators, including the Federal Reserve, the FDIC, and the U.S. Treasury, have unleashed their collective powers in an attempt to address the emergency. The Federal Reserve has provided liquidity to the banks, growing its balance sheet by over $100 billion in one week in the process, while the FDIC guaranteed the deposits of all of SVB’s depositors, whether insured or not. After first implying that such an unlimited guarantee might be extended to all U.S. bank depositors, on Wednesday U.S. Treasury Secretary Janet Yellen threw cold water on the idea, sending U.S. bank stocks into a tailspin from the moment she spoke, and, at least according to investor Bill Ackman, sparking the next bank run.
The costs and consequences of the bailout are likely to be enormous. And yet they may not even work. According to estimates by JP Morgan, over $1.1 trillion of deposits have disappeared from the regional and smaller U.S. banks in recent days, which banks have been forced to borrow from various U.S. government agencies’ emergency liquidity facilities to plug the gaping hole. Of these deposits, an estimated near half has migrated to uninsured money market and similar funds outside of the banking system altogether, while another near half has moved to the TBTF banks, further increasing their size and riskiness as a result. A portion appears to have gone into precious metals and crypto as described below.
In Europe, one of the world’s largest and most well-known TBTF financial institutions, Credit Suisse, failed in a matter of days last week. With a balance sheet (CHF 531 / US$575 billion) larger than all the recently failed U.S. banks combined, Credit Suisse was a flagship of the Swiss financial world. Yet Credit Suisse was forced by the Swiss government to be acquired and absorbed into its local competitor, Union Bank of Switzerland, over the weekend. This action only serve to concentrate the problems of the two banks into one, making the situation worse, not better. While not a formal nationalization, the Swiss government has now taken on the risks of the combined group.
Now, just a few days later, the financial markets are once again blinking red over concerns that that another TBTF European bank, Germany’s Deutsche Bank, much larger than Credit Suisse with over $1.5 trillion in assets, may be the next to go. The cost of insuring against a credit default at Deutsche Bank has spiked by over 50 percent, despite reassuring words on Friday from Germany Chancellor Olof Scholz who declared—in response to a 15 percent drop in the bank’s share price earlier that morning— that Deutsche Bank was “very profitable” and that there no need for concern. Will the fabled German bank even make it through the weekend? No one really knows.
These are just some of the signs that things are not going to get better any time soon and may in fact get worse. I would that this were not the case, but if it is, what can be done to protect yourself financially?
When a ship at sea faces a monstrous storm that it cannot avoid, what should be done? It is not hopeless. But it’s not the time to run sails to the wind and sip cocktails above decks. It’s important to secure and stow everything, to close ports and batten hatches, to check emergency equipment and life rafts. In extreme cases, excess weight is tossed overboard. This serves as good of a metaphor as any for how you should be positioned in this financial environment.
This is not a moment for risk-taking and making major investments, but rather a time for preservation and defense. Take cover and take care.
For most, it is not realistic to exit the banking system altogether. But keep bank deposits below the $250,000 ceiling for FDIC insurance. Just because the FDIC rescued SVB’s big depositors once is no assurance they will do it again. Diversify accounts among more than one bank if possible.
For savings or investment that isn’t needed in the short term in a transactional account, look to alternatives outside of the banking sector and broader financial markets system. Money market funds, whether backed by corporate or government issued paper, are not a safe harbor. These funds are not insured, and, as was evidenced in the 2008 financial crisis, they can “break the buck,” i.e., their value can fall well below the dollar peg they seek to maintain. Equity and bond markets are likely to remain volatile with more risk to the downside, but short dated (less than one year) U.S. Treasuries are yielding between four and five percent, which feels attractive on a risk-adjusted basis for a short duration and defensive investment.
Precious metals can provide a safe harbor and downside protection in a financial storm. Gold and silver are back in demand, with prices rising 7% and 13% respectively since March 10. But for safety and security, it is important to hold the physical metal, not paper certificates representing hard assets over which these same at-risk banks and financial institutions serve as custodian.
Crypto has benefitted from the chaos, and may yet prove to be a hedge against banking sector risk. The price of Bitcoin is up 42% in just two weeks, while Ethereum is up 27%, but still well off of all-time highs from eighteen months ago. Bitcoin was created during the global financial crisis of 2008 as an alternative to the banking system, and this first use case has been reaffirmed by investors who have prompted a $200 billion increase in market capitalization (BTC and ETH combined) since March 10. Over the long-run crypto may face both regulatory and technological challenges, but may be a good medium-term means of diversifying and preserving value amidst the storm.
Just like with gold or silver, for safety and security it is important to keep your digital tokens off exchanges and other financial platforms that serve as custodian on your behalf. In a bankruptcy these assets are not yours, and you become a general unsecured creditor of the failed firm. Keep your crypto in a private wallet that only you control, preferably in “cold storage,” i.e., a hardware wallet not connected to the internet. If all that sounds intimidating, perhaps take the weekend to learn how it works. It may be worth the effort.
This is a financial season when extra attention and extra care is warranted.
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