It might be time to reassess one’s relationship
With worry mounting over recent bank failures, the Association of Professional Builders has issued guidance to consumers in an effort to assuage their concerns.
“In terms of banks, it’s important to know that as a consumer, the government in the U.S. guarantees their money with an institution up to $250,000,” Russ Stephens, co-founder of the Association of Professional Builders, told Mortgage Professional America during a telephone interview. “That is the safest bet. If you’ve got excess cash, I would be spreading it amongst multiple banks to make sure you’re covered by that guarantee.”
In short order last month, Silicon Valley Bank and Signature Bank both failed, sending shock waves across the financial markets while prompting worries about a systemic failure in the banking sector. Pundits have mitigated worries by pointing to unique characteristics of each failed bank that gave way to their collapse, yet anxiety remains over the potential for further contagion.
What led to the Silicon Valley Bank failure?
Stephens tried his own hand in easing fears given the uniqueness of Silicon Valley Bank, as an example. “it’s a very unique situation, Silicon Valley, because it was a small number of high-wealth investors who had their wealth essentially non-insured,” he said.
“They were all very connected. As soon as one of those investors got wind Silicon Valley was in trouble – and they weren’t in trouble because they made risky bets like banks did in the GFC [Great Financial Crisis], they made what were perceived to be sensible bets on government bonds but because of hiking interest rates, those government bonds have devalued, which left them in a vulnerable position. So once one of the investors realized that and started speaking to the other investors – because they were all connected – they all pulled their money out and we had a bank run and the collapse of a bank very quickly.”
Regardless of such unique characteristics, Stephens suggested this might be a good time to start reassessing cash holdings. “First and foremost, it’s not a smart idea to have the majority of your net wealth in cash because it’s effectively devaluing,” Stephens said.
“Although interest rates have come up quite nicely, they’re still below inflation so your wealth is effectively devaluing when you hold it in cash. So the reason you might want to hold cash is for insurance purposes rather than investment purposes.
“To protect your wealth, you really need to be in property or equities over the long term – with the cash element used for balancing. But to reiterate, you need to look at the cash as insurance rather than investment. You’re not going to get rich holding cash in the bank. That’s why it still makes sense to forego maybe a higher interest rate by having concentrated in one bank because it’s insurance. You’re not chasing the return but basically mitigating risk.”
Unfortunately, there’s no easy way for consumers to discern if a bank is potentially in trouble given its investments mix, Stephens confirmed. “It’s quite difficult to predict, and as we’ve seen with Silicone Valley it happens very, very quickly. Rather than worrying about that, as long as you’re protected you’ve got the government guarantee. I wouldn’t lose too much sleep over trying to understand the financial clarity of a bank. I think in terms of banking, we don’t want to go the path of too big to fail, because we know no one is too big to fail.”
Which banks are collapsing in 2023?
Having said that, Stephens did note having read of some 186 banks that may be overly exposed to devaluing government bonds. Indeed, the Social Science Research Network issued the report, suggesting a high number of banks could be at risk of collapsing in a similar fashion as Silicon Valley Bank. As its premise, the report found that the banks on the list could face significant trouble should half of their depositors yank their funds. What’s worse, researchers conclude the FDIC may not be able to fully cover affected consumers should such a mass withdrawal of deposits occur.
“My personal belief is if we saw a mass collapse of banks, the whole financial system would be at risk so I don’t believe that would happen,” Stephens said. “I think just like we saw in the GFC and more recently during COVID, the government will print as much money they need to print in order to shore up the system.”
But that creates problems of its own, he noted: “And that actually creates a bigger and more dangerous problem because every time they print money, it devalues all the money we already have,” he said. “And that’s another reason why you don’t want to be totally invested in cash.”
