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From there, more money is withdrawn, so SVB sells more bonds and books more losses … the vicious cycle feeds on itself until it's all over.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

Killarney for Palestine recently held a sold-out screening of the Oscar-winning documentary ‘No Other Land’ at the West End School of Arts, raising €2,100 for Camp Breakerz. The event, which […]

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Killarney for Palestine recently held a sold-out screening of the Oscar-winning documentary ‘No Other Land’ at the West End School of Arts, raising €2,100 for Camp Breakerz.

The event, which took place on July 3, included two screenings, both of which were fully booked. Guests enjoyed cheese and wine before the shows.
‘No Other Land’ depicts the ongoing destruction in Masafer Yatta, a cluster of villages in the Southern West Bank, and shows the experiences of Palestinians under Israeli occupation. The film won in the Best Documentary category at this year’s Academy Awards.
The screenings were organised in association with the West End School of Arts.
All proceeds from the €25 tickets benefited Camp Breakerz Crew, a children’s charity based in Gaza that provides creative outlets through dance and is involved in food distribution programs in Nuseirat Camp and Deir-Al-Balah due to food shortages.
Sally MacMonagle, who recently spent time in Aida Refugee Camp in Bethlehem, also spoke at one of the screenings.

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Bid to host European Presidency summit meetings gathers pace

Fianna Fáil Spokesperson on Tourism, Michael Cahill TD, has highlighted Killarney’s suitability to host summit meetings of international Government Ministers during Ireland’s six-month European Presidency tenure in 2026. Deputy Cahill […]

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Fianna Fáil Spokesperson on Tourism, Michael Cahill TD, has highlighted Killarney’s suitability to host summit meetings of international Government Ministers during Ireland’s six-month European Presidency tenure in 2026.

Deputy Cahill believes Kerry’s available accommodation, food, and conference facilities are “second to none,” with Killarney as the central location.
“Visitors from every corner of the earth have been coming to Kerry for centuries now, to experience its beauty and serenity and have returned on many occasions because of the fabulous time they have enjoyed during their stay here,” said Deputy Cahill. “Where else would you want to bring the senior Government Ministers of all of our EU counterpart states, to experience Ireland, its customs and heritage?”
The Rossbeigh TD outlined various attractions available for visitors during downtime: “During their downtime, they can visit the Blaskets and Slea Head, Sceilg Mhichíl and the Ring of Kerry, Killarney’s Lakes, Gap of Dunloe, National Park and Sliabh Luachra, all of our glorious beaches from Ballybunion to Rossbeigh, Kells to Ventry, Whitestrand to Inch, Ballinskelligs to Cromane, Waterville to Derrynane.” He also cited Kerry’s golf courses, Listowel Writers Week, the Rose of Tralee, and Puck Fair as potential experiences.
Deputy Cahill confirmed he has raised this matter with An Taoiseach, Micheál Martin; An Tánaiste and Minister for Foreign Affairs, Simon Harris; and Minister of State for European Affairs, Thomas Byrne.
“If Killarney’s bid is successful in bringing the Heads of State to our county for meetings, conferences and functions, it will be a massive boost to the local economy in Killarney and also throughout the county,” added Cahill.”Iwill continue to push in the coming months for Killarney and Kerry to be included as bases for the rounds of meetings that are to take place from July 1 to December 312026.”

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