Commentary
The banking crisis, which became visible to most Americans only with the sudden and unexpected collapse of Silicon Valley Bank (SVB) two weeks ago, has not abated. There are reasons to believe it will become 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 also of Silvergate Bank and Signature Bank, as well as the emergency rescue of First Republic Bank by a consortium of 11 of the “too big to fail” 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 more than $500 billion in assets before their demise, and two of them (SVB and First Republic) were among the top 20 largest banks in the United States. This is serious.
The U.S. financial regulators, including the Federal Reserve, the Federal Deposit Insurance Corp. (FDIC), and the Department of the 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, last week 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, more than $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 emergency liquidity facilities to plug the gaping hole. Of these deposits, an estimated near half have migrated to uninsured money market and similar funds outside of the banking system altogether, while another near half has moved to the largest U.S. 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 too-big-to-fail financial institutions, Credit Suisse, failed in a matter of days last week. With a balance sheet of CHF 531 billion ($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 (UBS). This action only served 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.
A logo of Swiss bank UBS on a building in Zurich, on Nov. 14, 2013. Fabrice Coffrini/AFP/Getty Images
Now, the financial markets are once again blinking red over concerns that that another massive European bank, Germany’s Deutsche Bank, which is 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 from German chancellor Olaf Scholz, who declared—in response to a 15 percent drop in the bank’s share price earlier— that Deutsche Bank was “very profitable” and that there no need for concern. Will the fabled German bank even make it through the week? No one really knows.
These are just some of the signs that things are not going to get better anytime soon and may in fact become worse. If that were the case, 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 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 financial crisis of 2008–09, 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. Treasurys are yielding 4–5 percent, which feels attractive on a risk-adjusted basis for a short duration and defensive investment.
Precious metals also can provide a safe harbor and downside protection in a financial storm. Gold and silver are back in demand, with prices rising 7 percent and 13 percent, 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.
Gold bars and coins are stacked in the safe deposit boxes room of the Pro Aurum gold house in Munich, Germany, on Aug. 14, 2019. Michael Dalder/Reuters
Cryptocurrency has benefited from the chaos, and may yet prove to be a hedge against banking sector risk. The price of Bitcoin is up 42 percent in just two weeks, while Ethereum is up 27 percent, but still well off their all-time highs from 18 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 (Bitcoin and Ethereum 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.
The Epoch Times Copyright © 2022 The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.
