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The second biggest bank failure in history

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From there, more money is withdrawn, so SVB sells more bonds and books more losses … the vicious cycle feeds on itself until it's all over.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

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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.

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10-minute plays will linger in the memory

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The West End House School of Arts is delighted to take part in this year’s St Patrick’s Day Festival with a special evening of entertaining readings on Friday, March 13 at 7.30pm.

It promises to be a vibrant showcase of five original 10-minute plays written by emerging local playwrights, each of whom has recently completed a playwriting course with Fiona Doyle (pictured).


Diverse in style and subject matter, these beautifully crafted pieces promise an evening of laughter, tears, and powerful storytelling and each reading will be performed by West End House actors from Kerry.


Together, they highlight the remarkable talent of these up-and-coming writers and actors, who are the future of theatre in our community.

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Get your scrap together

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Following the success of the first ever Killarney Lions Club scrap metal collection in 2025, the Club will again run the event this year in partnership with KWD Recycling on March 28, at Killarney Racecourse.

Similar to 2025, money raised through recycling the metal will go towards improving facilities for families attending the children’s cancer unit in Cork University Hospital, as part of an overall fundraising drive being coordinated by Lions Clubs all over Munster.

The Club is asking people to bring non-ferrous scrap metals such as aluminium, copper, brass, zinc and stainless steel (no white goods such as fridges/cookers washing machines). Volunteers will be on hand from 9am until 4pm to take donations of scrap and work with KWD Recycling to remove it for processing.

“Although Lions Clubs in Munster have already raised some funds for CUH, more is still needed, so we’re delighted that KWD Recycling is working with us again to support this very worthwhile cause”, said Jason Higgins, President of Killarney Lions Club. “We’re asking anyone who has scrap metal at home, at work or on the farm now or in the next few weeks to please bring it to the Racecourse on the day because everything we collect will make a difference.”

Tadhg Healy, Sales Manager at KWD Recycling added that “We will recycle any high quality scrap metal that we collect – it can be quite valuable and of course it’s better for the environment if it’s recycled instead of being dumped. On top of that, the main thing with this collection is to help families of children with cancer, so hopefully we’ll get a good response from everyone and raise as much money as possible through this event”.

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