Sunday, 12 March 2023

US Financial System Maybe On Brink of Collapse- Run On Bank Contagion Risk.

What a week it has been which culminated with the collapse of 2 US banks within a week. The collapse of Silvergate Capital Corp followed by the Silicon Valley Bank ("SVB") is absolutely shocking. It does not help when US Treasury Secretary Janet Yellen said that she is monitoring "a few banks very carefully” and that it’s a “matter of concern” that banks such as SVB Financial are experiencing financial losses. The monitoring "a few banks very carefully" remark certainly does not calm the market but further eroded market confidence in the US financial system. This could ended up worse than 2008 and rival the Great Depression in 1937 if the US Treasury and Federal Reserve failed to instill confidence and resulted in nightmarish bank runs (trademark of the 1937 economic collapse) by depositors.

1. What happened to SVB?
To put it simply, SVB has been screwed badly by the relentless interest rate hikes that eventually caused irreparable losses to its balance sheet and a run on bank calamity.  

During the COVID pandemic economic downturn, SVB has been mopping up technology start up cash as deposits to fund their loans to clients and also reinvesting much of it into US government securities. 

Now, with the interest rate hikes by the US Federal Reserve, many of those depositors are unable to raise fund via equity and have to draw down on their deposits to fund their working capital. In order to meet the huge demand for cash withdrawal, SVB has to start liquidating its assets in US Treasury which started to take realised losses of US$1.8 billion (basic bond fundamental 101: As interest rate goes up, price of bonds goes down). While SVB tried equity fund raising to plug the deficit, it was just too late. Some SVB clients pulled their money from the bank on the advice of venture capital firms such as Peter Thiel's Future Fund. This spooked investors such as General Atlantic that SVB had lined up for the stock sale, and the capital raising effort collapsed late on Thursday.

2. US Fed Chair Jerome Powell still wants to do mega hike of 0.5% 
Interestingly, a couple of days ago, Jerome Powell is still adopting a hawkish stance for March 2023. He has cautioned that interest rates are likely to head higher than central bank policymakers had expected. 

With the bank run and collapses of the 2 banks, it maybe time for Jerome to re-consider his stance carefully or risk running the US economy into a ditch.

3. Opportunities arising soon
If the situation in US worsen significantly, this may finally signal the reversal of interest rate hikes which will boost stocks such as REITs. One might also be able to load up on various blue chip banking stocks at discounted market prices given the waves of contagion risk. Fear and an utter loss of confidence may mean a lot of stocks ended up in a once a decade kind of fire-sales.

I am also wondering whether it will lead to greater loss of job in worldwide and also in Singapore. If so, the super buoyant Singapore property market may be the next asset class to crash.

Parting thoughts
I will still be buying into more REITs and also banking/financial stocks over the next 2 weeks. There is no point to try to time the market to wait. Just continue to invest regularly during this gloomy period will be my approach. While there are some parallels to 2008 Global Financial Crisis and also the 1937 Great Depression that I am seeing, the current situation is also another unique different creature altogether. Only time will tell how this gets play out over the next 12 months.  

(Note: As at 13 March 2023, another US bank forced to close -Signature Bank collapsed too. I was surprised to see a number of commenters in other blogs mentioned contagion risk of run on other banks after SVB is limited and not serious. If it is not serious, the US regulators will not be stepping in so quickly. I thought it is common sense that a lack of confidence will lead to the collapse of the entire banking system. Strange that  folks are trivializing the run on banks).

No comments:

Post a Comment