Silicon Valley Bank, Signature Bank, First Republic Bank, all banks in trouble or done. Credit Suisse is saved with government capital, leaving many Swiss inhabitants furious about the board of directors still receiving annual, sky-high bonuses while they should be repairing their ship. While being generally small and unknown, the news of these banks being hit by financial turmoil has sent shockwaves across the world, raising questions about their stability. How did it come to this? How can this impact your investment portfolio? One thing is for sure: it all shows the huge tension in the markets worldwide.
What is going on?
General banks like the European Central Bank, The Federal Reserve, and also the Bank of Japan have raised their interest rates to battle inflation. But that comes with a tipping point leading to serious trouble for other banks as well. While these small banks were investing in government bonds in the past as obliged by regulation, the same bonds have dropped in value to this very day. With less money flowing back as needed, the banks ran out of healthy capital. After all, consumers continue to borrow a lot of money to absorb the higher costs and to make investments such as house renovations. Loans the bank does not have the capital for. The banks sell the government bonds bought in the past, to pay their customers. Short sellers published a report referring to this, which people saw as a bad sign and massively withdrew their money, the same as the investors of the banks. Double trouble.
America for example, is now facing a debt crisis that holds an all-time high national and consumer debt amount: 986 billion dollars that are elsewhere than in a bank's drawer, making them unstable. Could this have been prevented? Yes. Is it easily solved? No. The current banking crisis is the result of years of bad decisions, consumerism, and poor regulation, which totally needs a deep reset. For example, the position of a bank needs to be thought over. Banks are regulatory obligated to buy bonds.
A loud minority of short sellers
But the fallen banks did not necessarily have to crash like they did when less valued bonds were the only issue. After all, in the meantime bonds become lower in value, a bank can keep them on the balance sheet for the value they bought them for. It does not need to mark bonds to market. It is mandated that banks only mark the principle on their balance sheet. Silicon Valley Bank had more than enough liquid assets to comply with fractional reserve banking regulations. Therefore the risk is even higher, although the fundamentals were a driver for the arguments used by short sellers, most of all it's the risk of a loud minority creating a "game stop" style frenzy against a bank, leaving it empty-handed.
Governments have been working to stabilize the affected banks, such as the case with Credit Suisse, but it is a long and difficult process demanding more than a hammer, some nails, and a saw to repair. The policy needs to change. Many experts believe that the banking system will not be fully recovered for years because it has to reinvent itself. In the meantime, investors are faced with a choice: wait for the recovery or pull their money out and invest elsewhere. When things got terrible with Credit Suisse, investors massively dropped their stock leaving the bank 'begging' for money at the Swiss National Bank, which it received under the condition that it is now no longer independent.
The stock market at the moment: emerald green
Everything remains easy for now, although several experts believe a banking crisis lies ahead. Stock markets across the globe remain stable or rise even with this banking crisis raging in the background. That's because investors see some strength returning in the financial safety net holding strict regulations and so forth. The most likely outcome in general is that there will be some consolidation in the banking industry, done by partner banks or governments. Banks may merge or acquire one another in order to become stronger, more efficient, and more profitable. This could lead to fewer banks and larger banks, but it could also create a more competitive market and provide a better selection of services for consumers. This market then also lead to better strategies by banking boards, as the 2008 crisis also led to better policies to prevent banks from falling in the future. I.e. obtain and learn.
Regardless of the exact outcome, it is clear that the banking industry will need to adapt in order to remain healthy. Banks will need to review their strategies and focus on providing value-driven services that meet the volatility of the market. Fortunately, stricter regulations on what banks should or shouldn't do means that only weaker banks are currently failing. However, the consumer and investors' panic is closely monitored, because that often ensures whether banks collapse or not.
As an investor, it can be wise to only invest in larger banks, that have more reserves. Smaller banks can become prey to inflation, interest rates, and wild economies. Stock markets are now slowly decreasing again in value. That is in general. There are some stocks that remain stable. As long as consumers are ready to spend, the companies remain afloat and so do their stocks. Only when major banks fall, and a lot of consumers will stay without money, there can be a big problem. But it takes a lot to let that happen through all the regulations born from the past.
DHF Capital S.A. takes away the risk
'What can be safer than storing your asset in a bank?' one might ask. The maybe unexpected answer: investing. A keynote to that is to invest in the right things. But how do you figure that out? That takes a lot of skill, experience, and market understanding. DHF Capital S.A. is a leading provider of investment banking and asset management services. We believe that investing should be profitable for any investment goal, whether it is financial independence, retirement, or company stock. DHF Capital S.A. takes away the risk of investing in volatile markets by diversifying its portfolio across a wide range of asset classes. This allows the company to protect its clients' assets and generate returns even during periods of market turbulence.
Find contact with us anytime. For stability, advice, expertise, and a voice that listens to your plans. Ready to find out the possibilities?