Mar 2023 newsletter

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 Hi,

Spring has sprung with a lot of flowers blooming early everywhere. However, a lot of people have been shaken by the news of the bank collapse since the beginning of March.

Silicon Valley Bank (SVB) was ordered to shut down on March 10, days after being featured as Forbes' 20th of the top 100 America's Best Banks 2023. Crypto banks like Signature Bank and Silvergate Capital also collapsed in about one week. However, SVB is mentioned a lot in recent news because:

- SVB executives sold millions of shares before the collapse.

- SVB operated without an official Chief Risk Officer for 8 months during a difficult transition in the venture capital market. 

- SVB executive was the Lehman Brothers CFO before the 2008 collapse.

- The bank's business was concentrated heavily on startups financed by venture capitalists, which is extremely risky itself.

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But the craziest thing SVB did was it invested billions of dollars into long-term fixed-rate securities when rates were near 0%, leading to a massive mismatch on their balance sheet. When the interest rates increased, these securities' price decrease, leading to unrealized loss.

SVB was questioned about how come they collapsed due to 42 billion dollar withdrawals while its value was 200 billion dollars. 

This can be blamed on their lack of risk management. Instead of buying short-term securities or depositing the extra capital into Federal Reserve, they bought long-term fixed-rate securities. This caused an asset-liability mismatch, leading to liquidity issues, and when the bank run happened, it collapsed.

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What lessons can you learn from the SVB's failure?

- Risk management can't be ignored. In SVB cases, its business with venture capitalists and startups has its own risk. Besides, they ignored interest risks and liquidity risks. Do you have interest risks and liquidity risks? Yes, most investment portfolios have to deal with interest risks, which can reduce by diversification. 

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- Capital must be secured. 95% of SVB's deposits are not insured by the FDIC due to being over the $250,000 limit, which is more than $160 billion. I think a lot of people have thought of breaking up their money into $250,000 units and depositing them in different banks. A bank run is a real risk that all banks may encounter. 

- There is a Texas ratio which is used to measure the credit risks of the bank. If the Texas ratio is more than 100, that bank is having more non-performing assets than the bank's equity. SVB's Texas ratio last February was 185:1 was mentioned in a newsletter by Bryne Hobart, which was guessed to be a trigger to the bank run.

- You can find another place to store your cash for long-term use. When in need, you can withdraw cash in a short time, which reminds us of the role of the bank. However, even the banks have to store their reserve in BOLI-Bank-owned life insurance for their high-ranks employees. You may want to apply this for yourself and your family or business. The picture below showed us the list of 20 banks that use life insurance as their own long-term cash equivalents. 

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There is also a concern about whether SVB's collapse can affect other banks or not. It is said that due to SVB's narrow range of depositors, its collapse will not affect other larger banks with diversifying customers. Tighter regulations after 2008 have made the banks in the U.S. stronger. After the shutdown of 3 banks, other banks will have more market share from them.

Until today, SVB was sold to First Citizen Bank, so SVB customers automatically become customers of First Citizen Bank.

In mid-March, Credit Suisse - the second-largest bank in Switzerland collapsed due to its internal issues and was bought by its rival bank - UBS. 

And now investors are watching Deutsche Bank, a German Giant, slide down. A lot comment that the trust in the banking system is decreasing terribly. 

No investments are guaranteed to be safe. That's the reason for you to review your portfolio periodically and diversify it to minimize risks. 

HaLe, CRPC™

Milky Way Retirement

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