The recent failure of Silicon Valley Bank (SVB) is often blamed on poor management and risk practices. And while that is accurate, and may also be a factor in why other banks like Signature, First Republic, and Credit Suisse have similarly failed or are facing challenges, there’s also something telling in that they all started having issues around the same time. Every day it seems we hear about another bank in trouble, and many news outlets are saying that we’re in the midst of a banking crisis. But what’s really going on, and how might it affect you and your portfolio?
The global banking system has undergone widespread changes over the last 15 years.
The financial—and sometimes more importantly, the monetary—system is highly complex and intertwined. Even professionals in the banking sector struggle to understand their nuances and how they have evolved. Since 2008 in particular, these systems have changed significantly, and in ways many both consumers and financial professionals still don’t understand.
This may be one reason we’re seeing so many banking issues occur at the same time: They all tie back to a global monetary system that doesn’t work the way it once did.
In today’s money market, smaller and regional banks face additional challenges.
As the world’s reserve currency, U.S. dollars are used by banks, governments, and businesses around the world to participate in the global economy. But following the 2007–2008 Financial Crisis and the Great Recession, banks have become more risk-adverse and less-willing to lend dollars, making it harder for many entities to get the currency they need.
This isn’t an issue for most of the world’s biggest banks—they are flush with cash and have no issues getting access to the dollars they need. But for the global banking system to function, money needs to flow freely between those with plenty of cash to those without enough—and right now, things can be more difficult for smaller and regional banks like SVB.
For example, one way smaller institutions get access to dollars is through loans. And just as with any consumer loan, loans between banks require collateral in the form of high-quality and liquid government debt, like Treasury bonds or bills or other assets the bank owns. With collateral, large banks don’t need to put as much trust in the smaller financial institutions that need to borrow. If the borrower can’t or doesn’t repay the loan, the lender knows it can sell the collateral and recoup its money.
The concern is that recently, there’s been a scramble for this type of “good” collateral. Some smaller and fringe banks, including Silicon Valley Bank (which failed) and First Republic (which had to be saved by several other banks), seem to have been cut out of this funding market entirely, which puts them at greater risk.
In fact, the market for money at the wholesale bank level is so tight right now that over the last couple of weeks, the Treasury has auctioned off T-bills, with several of them being sold with a 0% yield. In simpler terms, this means that one or more institutions wanted these securities so badly for use as collateral that they were willing to accept zero return on them, even though there are far more lucrative options, like parking their money risk-free at the Federal Reserve for a greater, and sometimes decent, return.
Warren Buffett famously said, “Only when the tide goes out do you learn who was swimming naked.” As this tide of monetary supply has receded, we’re seeing which banks have been left closest to shore (perhaps because of their own poor decisions or policies). The question is: How much farther will the tide recede, and how many other institutions will experience a lack of access to the short-term funds they need to stay in business?
Our economy may be facing a “hard landing”—but there’s still time to protect your portfolio.
For the last year, the bond yield curve has been inverted, meaning that short-term bonds are providing a higher yield than long-term bonds. Plus, over the last couple of weeks, we’ve seen short-term rates on Treasuries fall by quite a bit in spite of the Fed still raising interest rates. Historically, these things occurring at the same time has been a very bad sign for the economy—which is why more and more analysts are concluding that the economy is in for a “hard landing” as we come down from high inflation, and that the “soft landing” the Federal Reserve was trying to achieve is becoming less likely.
We’re seeing other signs of a possible hard landing as well. Just as financial institutions have been scrambling for “good” collateral, central banks and consumers alike have been scrambling to diversify their holdings and reduce their overall exposure to financial risks. One way they’re doing this is by purchasing physical gold. Historically, gold has been seen as a hedge against market uncertainty and turmoil and is a time-tested store of wealth.
If you’re worried about an uncertain future or concerned about the security or stability of the global banking system, an allocation to physical gold may be the wealth protection you’re looking for. Call U.S. Money Reserve today and speak with a dedicated Account Executive about how physical gold can help add an important layer of protection to your portfolio.