Lessons learned from recent bank failures
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Silicon Valley Bank (SVB), established nearly four decades ago by former Bank of America executives to serve technology startups, faced collapse on March 10th due to a run-on deposits and concerns about meeting liquidity requirements. SVB’s failure sparked contagion fears throughout the banking system.
Over the weekend, the U.S. government and Federal Reserve quickly intervened to protect depositors of both SVB and Signature Bank. The Federal Deposit Insurance Corporation (FDIC) established bridge banks to maintain the operations of both institutions while seeking buyers through auctions.
In recent years, SVB had experienced significant growth, expanding its asset base to $213 billion during the pandemic. It became the largest Silicon Valley bank by deposits and the 16th largest in the U.S. However, the bank had invested some of its deposits in bonds, which lost value due to the Fed increasing interest rates to combat rising inflation. Additionally, SVB’s deposit growth turned negative over the past three quarters, forcing the bank to sell its bond holdings at a substantial loss.
What can we learn from recent bank failures?
There’s no need for panic, but the liquidity risk is real in the current environment of rising interest rates. Although the Federal Reserve indicated a potential slowdown in rate hikes in February, recent economic data suggests they may resume aggressive interest rate increases. This is because the economy is still heating up, and the Fed aims to control inflation by slowing it down. Rising interest rates are just one part of the equation, as inflation leads to faster cash turnover, potentially reducing deposits over time.
Financial institutions should consider a liquidity plan, such as incorporating cryptocurrency. In cases of tight liquidity, they may need to sell investments at a loss to improve their liquidity position. These losses could worsen rapidly. It’s crucial to assess unrealized losses and estimate the impact on capital if those losses were realized. SVB’s situation should prompt a review of business focus, including sector, geography, and customer base.
Key questions for senior management teams to consider include:
- Are your customers sensitive to the interest rates you’re paying?
- How stable are your deposits?
- Will rising costs and inflation cause your customers to deplete their savings accounts?
- What liquidity sources do you have, and will they be accessible?
- What would a borrowing arrangement look like if you were to borrow against your Held-to-Maturity (HTM) portfolio?
By addressing these questions, financial institutions can better prepare for and manage liquidity risks in the face of rising interest rates and inflation.
How is crypto currency better than commercial banks?
Cryptocurrency was conceived as a grassroots movement by people who recognized the limitations and risks of traditional banking systems. They aimed to create a payment and exchange system that was secure, private, and not controlled by any single government or powerful entity. Instead, it would be accessible to everyone with internet access, free from government constraints, geographical borders, and regulatory obstacles.
Here are the top reasons why you should accept cryptocurrency:
No government control: Cryptocurrencies are decentralized, meaning no single government or entity can manipulate or devalue them.
Elimination of middlemen: Cryptocurrency transactions can be executed without the need for third parties, streamlining processes like property or car purchases.
Universal access: Cryptocurrencies provide financial inclusion for people who lack access to traditional banking systems but have internet access and mobile phones.
More efficient charitable giving: Cryptocurrencies enable direct transfers to charitable organizations or individuals in need, bypassing intermediaries and reducing transaction costs.
Inflation protection: Cryptocurrencies have capped supplies, preventing uncontrolled increases in coin availability and protecting against inflation. Some coins have a fixed cap, while others have annual caps, maintaining a controlled inflation rate.
By accepting cryptocurrencies, businesses and individuals can leverage these benefits to improve financial transactions, promote inclusivity, and participate in a more efficient, secure, and globally accessible economic system.
How does this affect banking customers?
Although cryptocurrencies offer several advantages, they may not be able to fulfill all consumer needs. For certain financial requirements, such as securing car loans, mortgages, or other financial support, traditional banks are still essential.
Storing your money in a bank account provides easy access to funds whenever needed, without the risk of being tied up in a volatile currency investment. While this might involve occasional visits to your local bank branch, it ensures convenient access to services and robust security for your hard-earned money.
In conclusion, while cryptocurrencies have unique benefits over traditional banking and investment options, they may not offer the same level of security and stability as using your local bank. When banking with a regulated financial institution, you can trust that your money will retain its value, and the practices governing your funds are strictly regulated by federal law. If security and safety are your priorities, a local bank branch is likely the best choice.