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From there, more money is withdrawn, so SVB sells more bonds and books more losses … the vicious cycle feeds on itself until it's all over.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

Concerns over future of St Mary of the Angels

Two Kerry TDs have voiced concerns over the future of St Mary of the Angels and St Francis Special School in Beaufort, highlighting the urgent need for respite services for […]

Published

on

Two Kerry TDs have voiced concerns over the future of St Mary of the Angels and St Francis Special School in Beaufort, highlighting the urgent need for respite services for children and adults with profound disabilities and special needs.

The campus, set on lands generously donated by the Doyle family, offers 30 acres of grounds, existing buildings, and services, making it a valuable asset for the provision of respite care in Kerry. TD Michael Cahill emphasized that the Doyle family’s wishes should be respected, and that the grounds should be made accessible immediately.
“The special needs community in Kerry has a major respite crisis and families don’t have time to wait. Families need help — they are not asking for full-time residential care but respite care, a break, a helping hand,” Deputy Cahill said.
He added that a bespoke approach is needed to meet the individual needs of children attending St Francis Special School. “Many of the children in the county with profound needs need a safe haven where they can roam the grounds freely, and St Mary of the Angels offers this.”
Deputy Cahill has accompanied several Ministers to the Beaufort campus to highlight its value to Disability Health Service providers. A working group has been formed including St John of Gods, the HSE, representatives of residents at St Mary of the Angels, and St Francis Special School, to explore options for maintaining and expanding respite services.
“Parents are worn out and at the end of their tether. This needs to be dealt with expeditiously, in an environment of cooperation between the relevant Government Departments of Health, Disability, and Education. We need to get this across the line urgently and put it permanently in place,” he said.
Deputy Cahill pointed to the current shortfall of respite services in Kerry. “As of now, Cunamh Iveragh respite in Cahersiveen is only open Friday to Sunday, running at half capacity — two adults per night instead of four. The issue is staffing, and the HSE will not release funding to open full-time. The Beaufort campus is available and should be utilised as parents are crying out for overnight respite. Cooperation and compassion could see this done quickly.”
TD Danny Healy Rae echoed these concerns during a Dáil speech this week. “We are still short of respite beds on the southern side of the constituency. Families caring for people with disabilities just want a break, but there is nowhere available locally. Places are being offered only in Tipperary or Meath for those needing new residential care. It makes no sense. St Mary of the Angels in Beaufort has 40 or 50 acres of grounds that could be expanded, with facilities already in place such as swimming pools. It could be developed as a model for the rest of the country.”
Both TDs are urging the Government and the HSE to take immediate action to utilise the Beaufort campus for respite care, in line with the intentions of the Doyle family and the needs of Kerry families.

Continue Reading

News

Cardiac Response Unit’s ‘Restart a Heart’ training event

Killarney Cardiac Response Unit (KCRU) is set to run a range of events as part of the global initiative Restart A Heart, which aims to increase awareness and actual rates […]

Published

on

Killarney Cardiac Response Unit (KCRU) is set to run a range of events as part of the global initiative Restart A Heart, which aims to increase awareness and actual rates of bystander CPR worldwide.

The main event, titled RAH 2025, invites the public to learn life-saving skills and the basic steps in the chain of survival. This will take place on Saturday, October 18, at the Killarney Outlet Centre.
Members of the public are encouraged to join KCRU at the centre between 10:00 am and 5pm.
Key feature of the day will be the CPR Competition, offering “fantastic prizes to be won.”
For further information, visit www.killarneycru.ie/rah25

Continue Reading