Is your cash safe in the bank?

On Friday 10th of March 2023, United States regulators seized the assets of California-based Silicon Valley Bank (SVB), after depositors had begun withdrawing funds en masse amid fears over the lender’s financial health. Since then, financial regulators around the world have raced to contain the fallout of SVB’s collapse, the biggest bank failure in the US since 2008, and shore up confidence in the global financial system.

Why did SVB collapse? As SVB’s name suggests, the bank’s business focused heavily on US technology startups. During the COVID-19 pandemic, the lender saw a surge in deposits as tech companies profited from providing entertainment and delivery services to people confined to their homes. SVB invested much of this cash in US government bonds — traditionally one of the safest types of investment. SVB’s troubles began when the US Federal Reserve started raising interest rates last year in response to soaring inflation, causing the value of those bonds to fall. As economic conditions for the tech sector became more straitened following the pandemic boom, many of SVB’s customers began to draw on their funds to keep their heads above water. Short on cash, SVB was forced to sell its bonds at big losses, prompting concerns about its financial health.

Within 48 hours, spooked depositors withdrew sufficient funds to cause the bank’s collapse. As one commentator said, “SVB collapsed because of a stupid rookie mistake with regard to their interest rate risk management: they invested short-term deposits in long-term bonds. When interest rates rose, the value of the bonds fell, wiping out the equity of the bank.”

Why is this news important to you as an investor? To remind you that even cash in the bank is not always safe. Before you panic, consider the following: in the USA any bank deposits up to $250 000 are protected by the government. In South Africa this applies to R100 000. The problem is that cash in the bank above that mark is not protected and if the bank goes insolvent like Saambou (2002) and VBS (2018) did in South Africa, you have problems. Another reason not to panic is that the SVB bank was a regional bank (16th biggest in USA), not a national one like Bank of America. The top six banks in SA are well capitalized and regulated and if you stick to them you should be safe.

Something very interesting happened during this mini- banking collapse. For the first time in a long time, government bonds, crypto and gold all strengthened while equities suffered. This inverse movement used to be the norm and that is why bonds and gold used to be known as the safe investments and the backbone of a balanced portfolio. The turmoil caused by this event reiterates the reliance and role the world’s financial system places on banks. Banks cannot exist without the confidence of depositors and the financial system cannot function without the banks.

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