Is the Next Major Banking Crisis Coming?
No one expected this: Silicon Valley Bank’s stock plummeted by 5% last Thursday, dragging down the share prices of other financial institutions. The combined value of the four largest U.S. banks—JP Morgan Chase, Bank of America, Citigroup, and Wells Fargo—fell by a total of $52 billion. European financial stocks were also brutally sold off. Leading the losses is Deutsche Bank, whose shares fell by a full 8%. What is brewing there?
Silicon Valley Bank is one of the most important startup financiers. The institution triggered the stock plunge because it needed cash and therefore sold bonds worth $21 billion to maintain liquidity. The bank incurred a loss of $1.8 billion in the process, as the securities dated back to an era of low interest rates. Through this move, Silicon Valley Bank not only lost investor confidence but also fueled fears that the same scenario could repeat itself at other banks.
What followed was a bank run on Silicon Valley Bank’s approximately $89 billion in deposits (as of March 8). Customers wanted to withdraw or transfer a total of $42 billion of these deposits after March 9, which led to the collapse. The U.S. government responded by freezing the bank’s accounts and temporarily taking control of the financial institution. Investors, especially many startups, feared for their money and their very existence. Many investors had also assumed that the best way to profit from currently rising interest rates was to invest in financial stocks. They were rudely awakened from this dream.
The situation is strongly reminiscent of the beginning of the major financial crisis of 2008. That crisis escalated with the collapse of investment bank Lehman Brothers. Previously, the institution had managed to stay afloat from June to September with a cash injection of $45 billion; only in its final week did it show a liquidity deficit of $40 billion—a gap similar in size to that of Silicon Valley Bank. However, there was one crucial difference: Lehman survived three months with its financial assistance, while Silicon Valley Bank lasted only 24 hours.
What a relief it was when the good news came on Monday: “The deposits are safe!” The Fed must be given the highest praise for its swift intervention—it really didn’t have much time. However, the quick and efficient handling of the problem also shows that they were apparently prepared for such disruptions. These financial stocks appear in all too pale a spotlight in this rehearsed theater piece.
Commodities, by comparison, present themselves significantly better. For example, there is no “Rhenium Bank” that can suddenly run out of money. Production-critical metals always have value and are not part of the banking system, so they cannot be destroyed by mismanagement. The best time to invest in this crisis protection is now, not least because of tax-free purchase and tax-free gains after one year of holding.