What are the lessons to be learnt from the fall of four big banks worldwide?
The recent collapse of well-established, reputed money lenders raises many questions
Dubai: If you’ve been following the news, you would have not only heard of the collapse of four banks in the span of just 11 days, but also been warned of more such collapses to come. But is there cause for actual concern?
Silvergate Capital was the first US bank to collapse, followed by US-based Silicon Valley Bank. Soon after Signature Bank became the third-largest bank failure in US history, which was trailed by Switzerland-based lender Credit Suisse. But are these four collapses connected in any way?
Amid widespread alarms on a looming global banking crisis, fears have also intensified among people about the risk that their investments could be facing in the near future. So if these fears are warranted, should you as an investor be doing anything different with your money? Let’s find out.
Lesson #1: Don’t trust the market for liquid cash during a crisis
What should you learn from the Silicon Valley Bank collapse? Newbie investors and retirees are often advised that if you are not in a position to keep a healthy cash reserves, avoid selling portfolio assets when the market is down. This was one of the key takeaways from the recent Silicon Valley Bank collapse. Experts refer to this as the ‘sequence of returns’ risk.
“It’s a valuable lesson for investors who may someday face their own cash crunch,” said Mohammed Shaan, a Dubai-based personal finance planner and investment advisor.
“It’s key to remember that you shouldn’t have to end up going to the market for liquidity. For example, if you need funds, it’s typically better to withdraw savings before selling investments in a brokerage account.”
When the US hiked interest rate aggressively to curb inflation, analysts say because Silicon Valley Bank was not prepared for it, and this caused the value of its investments to shrink over a short period.
Rumours of its troubles spread, and customers withdrew $42 billion (Dh154 billion) in a single day, leaving the bank with a $1 billion (Dh3.67 billion) negative balance, according to a regulatory filing by the company.
Lesson #2: Even so-called safety of bonds aren’t reliable during a downturn
What should you to learn from the Credit Suisse collapse? Although UBS sealed a ‘rescue deal’ to buy peer Credit Suisse in a rescue effort to contain a banking crisis and stabilise financial markets, the deal only provided brief respite, as investor focus shifted to some of the underlying risks of the deal.
“There’s been a sudden loss of investor confidence in the financial system, particularly when the Swiss regulator decided that Credit Suisse debt with a value of $17 billion will be valued at zero, which left bond investors with nothing, infuriating them,” explained Anil Pillai, a UAE-based banking analyst.
“So while it's important to understand that bonds are generally secure, it’s not always safe.” (Borrowers issue bonds to raise money from investors willing to lend them money for a certain amount of time.)
Also, Credit Suisse investors will merely get about 0.76 francs per share from the UBS acquisition of Credit Suisse – much lower than their closing price of 1.86 francs, which means that even though it was a ‘rescue deal’, it was a loss-making one from an investor’s perspective.
In a deal engineered by Swiss regulators on Sunday, multinational investment bank UBS will pay around $3.23 billion (Dh11.87 billion) for 167-year-old Credit Suisse, which was once worth more than $90 billion (Dh330 billion).
This was after Credit Suisse was thrown a $54 billion (Dh200 billion) lifeline by the Swiss central bank to shore up liquidity after a 30 per cent slump in its shares. But this was not the first of its problems. A series of scandals and mounting losses caused its stock to drop 75 per cent in the last 12 months.
Lesson #3: Don't invest in crypto-exposed assets what you can’t afford to lose, don’t borrow to invest
What should you learn from the Silvergate Capital collapse? Investing money you don't have, known as leveraging, can be a strategy in the right hands but it is risky. This is particularly so in the case of FTX, which used its own cryptocurrency as collateral to raise loans, and for lenders like Silvergate Capital that have exposure to FTX.
“The FTX fiasco raises questions around sound financial management and alerts how people’s investments can at times be gambled away for financial gains,” said Brian Deshell, a UAE-based cryptocurrency trader and analyst.
“Leveraging is more dangerous than ever as central bankers worldwide tighten monetary policies,” added Dunn. “Money has become more expensive and harder to come by and that makes things very tricky for those who need to borrow to stay solvent.”
However, to guard yourself against such losses at an exchange or crypto-focused banks Silvergate Capital and Signature Bank, and Silicon Valley Bank, which had a lot of crypto start-ups as its customers, Deshell suggests ensuring liquidity, fees and history are essential checks you make.
US-based Silvergate Capital was primarily hurt by its exposure to the recent crypto industry's meltdown, which was triggered by investigation of fraudulent dealings of Sam Bankman-Fried's fallen crypto giants FTX and Alameda Research.
Silvergate's troubles deepened as the bank sold off its assets at a loss to cover withdrawals by its startled customers, and this eventually lead it to announce bankruptcy on March 8, wind down its operations and liquidate its bank.
Lesson #4: Withdrawal rush can still hurt banks, so protect your wealth across multiple investments
What should you learn from the Signature Bank collapse? “The recent meltdown shows that banks still pose risks, and it shows us that the financial system is much more fragile than the public had been led to believe,” added Pillai.
“The danger plays out when a bank’s clients all wish to take their money out at the same time – known as a ‘bank run’ – a repeat from the global financial crisis. The truth is depositors never really know how safe their money is, and when fear starts to spread, depositors rush to get money out.”
Customers in bank runs typically withdraw money based on fears that the institution will become insolvent. With more people withdrawing money, banks will use up their cash reserves and can end up defaulting. This is why financial planners advise investors to protect your wealth across multiple investments rather than just relying on your cash accounts.
The end of Signature Bank began with a surge in customer withdrawals that totalled about 20 per cent of the company's deposits after regulators said they lost faith in the company's leadership.
Late Sunday, New York Community Bancorp's Flagstar Bank agreed to purchase $38 billion (Dh140 billion) of Signature Bank’s assets, including $25 billion (Dh92 billion) in cash and about $13 billion (Dh48 billion) in loans.