In the last couple of weeks, the US had their 14th largest bank collapse. This week the headlines are going manic over Credit Suisse which is a large overseas bank.
This in conjunction with interest rates and inflation news – you can see why people are fearful .
But before we get our knickers in a knot, we need to slow down and get some perspective of what’s happening.
The bank that has been the headline is a Rural Bank from the USA Silicon Valley Bank (SVB).
SVB has put the majority of their money into long-term government bonds, which are typically a lower risk investment.
But then customers had a high withdrawal demand, so to keep up they had to sell off some of these bonds.
The problems here is that they were selling them for less than what was paid for.
This lead to an almost $2 billion loss … :-/.
Once their customers caught wind of that, they got panicked and it caused a ‘bank run’.
A bank run is essentially when too many people go to withdraw money at the same time and the bank runs out of cash.
Bang – this causes a collapse.
There are some key points here worth considering.
SVB is a tech sector / start up bank of choice, which is a sector that has been struggling a lot over the past few years.
So it makes sense why higher withdrawals were already happening prior to the ‘bank run’.
Lots of their customers we’re said to have had more than $250,000 in their accounts. What’s the significance of this amount? Like Australia, they have a $250,000 government guarantee.
Think of this like a safety the government has for times like these.
So those who have more than that figure with one institution would panic & consider diversifying their banks.
Hence, panic bank run.
Are we headed from another 2008?
Good news is – no it’s not and we’re not.
It’s pretty unlikely that we’ll see a collapse in Australia.
SVB had a pretty high-risk lending to tech companies, unlike our banks that focus more on property.
Our banks also have pretty good liquidity.
We have this $250,000 government guarantee with each financial institution. If your lucky enough to have this sum consider spreading the load across banks.
What we’re seeing is the banks share prices getting a bit of a wobble.
So we’re looking pretty good.
I’ll leave you with one final comment from the Michael Jordan of Investing: “Be fearful when others are greedy and greedy only when others are fearful.” – Warren Buffett
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