Commentary: Another banking crisis

If things weren't bad enough, the financial markets are bracing for another right hook to the body. Late Friday, Silicon Valley Bank (SVB) announced it had a four-feet-up moment and shuttered its doors to depositors. This was the second bank to flop over, as crypto-entity bank Silvergate (SI) led the charge down the rat hole a few weeks earlier. Although Silvergate is not a household name and its troubles will still cause nightmares for those who had money there, SVB had $175 billion in deposits with TV streamer ROKU claiming it alone had $475 million on deposit which is now in limbo. Although it will be some time before we get a detailed forensic X-ray as to what occurred at SVB, it is thought a steady stream of withdrawals from a variety of small companies, startups and technology firms forced SVB to close its doors. As interest rates increase and inflation bites down hard on the economy, money becomes tight, and cash is needed to finance and fund operations. The continuing withdrawals forced SVB to sell assets to meet the demand for cash, and in a down market with investment prices crashing, the losses at SVB began to mount. Friday was the day of reckoning for SVB and off went the lights as federal regulators barred the doors. Many think the money one puts into a bank sits in vaults collecting dust. But the reality is that banking regulators require only a small percentage of deposits be kept in house while the rest of the funds are lent out or used to purchase various permitted investments. There are two things that scare the hell out of me when it comes to the markets: currency problems and banking implosions. Although so far, no country of significant size has announced any issues surrounding a sovereign default or similar problem such as what we saw in the late 2000s (think Greece and Italy, to name a but a few past currency fiascos), a bank blowup of SVB's size is a significant event. Its potential ramifications bring up memories of the 2008 mortgage and banking implosion that almost brought down the world's financial systems. Although some SVB depositors will be made whole by FDIC insurance, which since 2008 stands at $250,000 per account (with more available under certain conditions), technically there stands to be much money vaporized should regulators let the chips fall where they may. That said, we have learned the Federal Reserve (FED) has much to say and do about such things. In 2008-09, the FED was up to its eyeballs in remedial programs to put out the world's financial fires that threatened our civilized existence, or so the story goes. I have no doubt the midnight candles have been burning bright in Chief Jerome Powell's FED building as they dissect the whole mess and decide what to do about it. In the past, such bank blowups have been handled by cobbling together similar institutions to pony up and pull out their checkbooks (look up the 1997 Long Term Capital Management rescue) or by forcing a shotgun wedding where another healthier bank gobbles up the sick one (think Merrill Lynch being force- fed to Bank of America in 2008). There are many challenges now facing the FED. Calming the panic among customers of SVB, likely making them whole again to prevent a run on other banks from now twitchy bank customers everywhere. The musical chairs we saw in 2008-09 where customers withdrew money or split funds between banks to get under the then-$100,000 FDIC limit only amplified the nasty situation that was unfolding. Another problem is the banks owe each other money through various financial conduits meant to grease the gears of systemic liquidity. When a major bank implodes, these conduits can slam in reverse as nervous financial managers all want to be the first one out the door with their money before the next guy defaults. This rush for the exits causes even more withdrawals but on a system-wide scale. I don't know whether this will be a one-off event or the start of something that could rival 2008-09. One thing is for certain, however: The FED will now have to print a hell of a lot of money to provide enough liquidity to calm jittery bankers and bank customers, let alone the billions of stock market investors already on edge from a 14-month stock market rout. Like I said, in my 45 years of studying the markets, only two things really scare me, and one just happened. This article expresses the opinion of Marc Cuniberti and is not meant as investment advice, or a recommendation to buy or sell any securities, nor represents the opinion of any bank, investment firm or RIA, nor this media outlet, its staff, members or underwriters. Mr. Cuniberti holds a B.A. in Economics with honors, 1979, SDSU, and California Insurance License #0L34249. His website is moneymanagementradio.com, and was voted Best Financial Advisor in Nevada County 2021. 530-559-1214.