Connect with us

News

The second biggest bank failure in history

Published

on

0252960_Mike_Stocks.jpg

By Michael O’Connor, theislandinvestor.com

The answer…about four days.

This week was dominated by the second-largest bank failure in US history.

A lot has already been written about the collapse of Silicon Valley Bank (SVB), but let's break it down in simple terms and look at the potential implications for investors.

Firstly, the issues that unfolded in SVB were not driven by fraud or questionable lending policies but by an asset-liability mismatch. SVB used liquid customer deposits to purchase longer-dated but safe, treasuries and MBS securities.

Tech-based start-ups and VC companies represented the majority of SVB's customers. These customers made a lot of money in recent years as the value of their companies skyrocketed, and they needed somewhere to put all this cash. So they gave it to SVB.

Typically banks will make profits by taking that money and lending it out to customers at higher interest rates in the form of loans. However, the majority of SVB's customers didn't need loans, so SVB invested all that cash in longer-dated bonds.

So, they now have very liquid liabilities (deposits) being offset by not-so-liquid assets (longer-term bonds).

There is nothing inherently wrong with this. Banks do it all the time. However, this interest rate risk would typically be hedged using swaps, but SVB had no such interest rate hedges in place to protect itself. This was the fatal mistake. Some shocking risk management decisions left them making a massive bet on the direction of interest rates. As you have probably guessed by now, the gamble didn't pay off.

As interest rates went up, the bonds went down in value.

Still, this is a relatively avoidable disaster, provided all depositors don't require their money back at the same time.

Lo and behold, some customers got nervous and withdrew their deposits. As more customers did this, SVB had to sell some of the 'safe' bonds they had purchased at a $1.8bn loss in order to give money back to customers.

Then some venture capital companies advised their start-ups to get their money out of SVB, which spooked customers further.

From there, more money is withdrawn, so SVB sells more bonds and books more losses … the vicious cycle feeds on itself until it's all over.

Two takeaways

.

While these latest developments are reminiscent of the GFC days, there are some crucial differences.

In my opinion, the risk of contagion remains low, mainly due to the Fed's decision to step in and protect deposit holders on Sunday evening.

Also, large US banks (above $250 Billion) have greater regulation scrutiny, have less concentrated exposure to a single niche and have smaller investment portfolios relative to total assets. Almost 60% of SBV's total assets were held in its investment portfolio vs a 25% average for US banks.

From here, I expect to see further concentration in the banking sector. Customers will flow from Tier 2 banks towards the larger (too big to fail) fully regulated institutions.

People are finally starting to realise that banks don't hold your money safely in a vault. You are simply a largely unsecured creditor in a system leveraging your money to make profits.

Bank deposit rates remain close to zero, so you are getting all the risk and none of the reward.

At the very least, any money that isn't needed for day-to-day living should be moved into very short-term T-bills or Euro bonds. These provide higher returns and a better level of protection for your assets. It's a no-brainer.

If you would like me to help you go from uninvested to invested, email mike@theislandinvestor.com or scan the QR code.

Advertisement

News

New Sunday date for 30th anniversary Historic Rally

The Killarney Towers Hotel Killarney Historic Rally will move to a new Sunday date for its 30th anniversary running. The event is scheduled to take place on Sunday, November 29, […]

Published

on

The Killarney Towers Hotel Killarney Historic Rally will move to a new Sunday date for its 30th anniversary running.

The event is scheduled to take place on Sunday, November 29, marking the opening round of the 2027 Irish Tarmac Rally Championship Historic category.

Five-time World Rally Championship event winner Paul Nagle will spearhead the event as Clerk of the Course. The appointment carries personal significance, as Nagle is the son of the late Maurice Nagle, the original founder of the rally.

The first Killarney Historic Rally was organised by Maurice Nagle in December 1996, shortly after the international Rally of the Lakes moved to its permanent May Bank Holiday weekend slot. Having served on the organising committee for the old winter Rally of the Lakes, Maurice maintained that Killarney had the capacity to host a motorsport event during the winter period. Over the last three decades, it has grown into Ireland’s only dedicated event for historic rally machinery, where an overall victory is as coveted as a win at the international event in May. “Taking on the role of Clerk of the Course for the 30th anniversary is a massive honour, but more importantly, it is an opportunity to protect and build upon the legacy my father left behind,” said Paul Nagle. “He believed that Killarney’s classic stages were the perfect arena to showcase historic cars, and he fought hard to establish this. Reaching 30 years of Ireland’s only dedicated historic rally proves his vision was right. We are fully committed to making this anniversary edition a special event that honours his memory and celebrates the history of historic motorsport.”

Nagle has promised a return to the classic Killarney tarmac that defined the event’s early years, confirming that stages such as Ballaghbeama Pass and Caragh Lake will feature on the itinerary for the Killarney Towers Hotel Killarney Historic Rally. Since retiring from professional co-driving in 2023,

Nagle has worked as an FIA Safety Delegate on several World Rally Championship events. Work is now underway to secure a strong field of historic rally cars, with some star names expected to join the Irish Tarmac Rally Championship regulars on the entry list. His experience in event management, combined with his international contacts, is currently being used to attract an expanded entry list. A promotional push is underway to secure a large field of historic rally cars, including several drivers from overseas. The event retains the title sponsorship of the Killarney Towers Hotel and Leisure Centre, located on College Street in the centre of Killarney town. The hotel’s town centre location is highly favoured by rally fans who return each year, having proved to be a popular base since the hotel first took on the role in 2023.

Managing Director of the O’Donoghue Ring Collection and Killarney Towers Hotel and Leisure Centre, Gemma Ring commented: “We are incredibly proud to continue our partnership with the Killarney Historic Rally as we enter our fourth year as title sponsor. This year’s event is especially significant as the rally celebrates its 30th anniversary, a remarkable milestone for one of Ireland’s most iconic motorsport events.
At the O’Donoghue Ring Collection, we have always been passionate about supporting events that showcase the very best of Killarney. The Historic Rally brings together competitors, enthusiasts and visitors from across Ireland and beyond, creating a fantastic atmosphere throughout the town while making a valuable contribution to our local businesses and community.
Congratulations to Killarney and District Motor Club and everyone involved in reaching this incredible 30-year milestone. We look forward to welcoming participants and spectators once again and wish everyone a safe, enjoyable and memorable weekend.”

Full route details and regulations for the Killarney Towers Hotel Killarney Historic Rally will be released by the Killarney and District Motor Club in the coming months.

Continue Reading

News

Rathmore’s Tearmann Lodge raises €1,200 for Kerry Hospice

The staff and residents at Tearmann Lodge in Rathmore recently came together to raise €1,200 for the Kerry Hospice Foundation . The facility, which is run by the Kerry Parents […]

Published

on

The staff and residents at Tearmann Lodge in Rathmore recently came together to raise €1,200 for the Kerry Hospice Foundation

.

The facility, which is run by the Kerry Parents & Friends Association, hosted a successful bingo evening and raffle in late March of this year. This follows a similar fundraising event held at the centre in 2024.
Residents at the lodge were encouraged to participate in the evening, which proved to be a highly positive and enjoyable experience for everyone involved.
Tearmann Lodge Manager Gillian Kenny facilitated the fundraiser, while staff member Irene O’Donoghue acted as the main organiser, with assistance from colleague Karen McCarthy and other members of the team.
The residential facility provides accommodation for nine residents, alongside an extra bedroom used for respite care when needed.
“Kerry Hospice would be close to the hearts of many here, both residents and staff, whose loved ones have benefitted from the services provided by the charity. We are delighted to be in a position to give something back in return,” Irene O’Donoghue said.
Pat Doolan of the Killarney Branch of Kerry Hospice expressed his gratitude to everyone at the centre during the official cheque presentation.
“This was another lovely gesture by all concerned and I want to thank them for their generosity. I spent some pleasant time over a cuppa with residents and staff members in the comfortable surroundings at Tearmann Lodge on the day of the cheque presentation. Esther Kelleher, who is a resident at the centre, entertained us with a lovely song,” Pat Doolan said

Continue Reading