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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From there, more money is withdrawn, so SVB sells more bonds and books more losses … the vicious cycle feeds on itself until it's all over.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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Book of Condolences for Pope Francis at Cathedral

  A Book of Condolences has been opened at St Mary’s Cathedral for those wishing to pay their respects following the death of Pope Francis. The Pope, who led the […]

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A Book of Condolences has been opened at St Mary’s Cathedral for those wishing to pay their respects following the death of Pope Francis.

The Pope, who led the Catholic Church for twelve years, died on Monday at the age of 88.

He had been suffering from double pneumonia in recent weeks, but his death still came as a shock to many. Just hours before his passing, he had been seen greeting crowds in St Peter’s Square during Easter Sunday celebrations.

Locally, Bishop Ray Browne has led the tributes. He described Pope Francis as “a gentle shepherd” who brought humility and compassion to his role.

“It was with great sadness that I learned of the death of our Holy Father Pope Francis,” Bishop Browne said. “From the moment he chose the name Francis, rooted in humility, he signalled a papacy of building peace, care for the poor, and love for all of God’s creation.”

The bishop also highlighted the Pope’s focus on protecting the planet and caring for the marginalised, calling him “a voice for the voiceless” and “a witness to the Gospel in word and deed.”

A special Mass in memory of Pope Francis was held at St Mary’s Cathedral on Wednesday.

The Pope’s funeral Mass will take place on Saturday at 10.00am in St Peter’s Square. It will be led by Cardinal Giovanni Battista Re, Dean of the College of Cardinals, and concelebrated by church leaders from around the world.

Due to the Pope’s passing, the special Mass for the canonisation of Blessed Carlo Acutis, which was due to take place this Sunday has been cancelled.

Mass will still take place at the usual time of 11.30am. A new date for the celebration will be announced in due course.

Blessed Carlo Acutis was due to be officially declared a saint in Rome on Sunda but that has been postponed.

Carlo Acutis had a deep devotion to St Francis of Assisi, and his final resting place is in Assisi, near the tombs of St Francis and St Clare.

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Con O’Leary: Killarney loses a vibrant and popular personality

Killarney Chamber of Tourism and Commerce has led the tributes to the late Con O’Leary, an extremely popular and very successful businessman in the town, who passed away in the […]

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Killarney Chamber of Tourism and Commerce has led the tributes to the late Con O’Leary, an extremely popular and very successful businessman in the town, who passed away in the early hours of Sunday.

Con was a vibrant and popular personality in Killarney where he operated The Laurels on Main Street, a thriving bar and restaurant, which he inherited following the passing of his father, Thado.
The business organisation said from a social perspective, The Laurels became the beating heart of the town and it was a landmark at the Market Cross in the same way as Clery’s clock was in the capital city.
Chamber said Con’s passing really marks the end of an era as he was one of a golden age of inspirational local business people who developed and built Killarney, through hard work, bravery and great commercial flair, and helped create the wonderful tourist attraction and holiday destination it is today.
“Con was very proud of Killarney and he played a very active part in progressing the town at many levels.
“He was a man that was never short of great ideas and his contribution to the business life of the town and as a director of Killarney Race Company was immense,” Chamber said.
“He was ahead of his time in many respects with the introduction by what became known as “the singing lounge” many years ago and The Laurels always led by example through its successes in the annual Killarney Looking Good competition”.
The business representative organisation noted that the O’Leary family has always been very supporting of the town and Con’s daughter, Kate, was a very dynamic Chamber President and is still a very valued member of the executive.
Chamber expressed deep sympathy to Con’s wife, Anne, children Kate, Niall, Tara and Lorna, sons-in-law, grandchildren, sisters, relatives and friends as well as the dedicated staff in The Laurels, past and present, who Con always had great time for and a great rapport with.

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