For those of us working in the financial industry during the 2008 Crisis, the last several days have had an uncomfortable element of déjà vu. First, cryptocurrency darling Silvergate Bank was the first to close last week. Next, much ballyhooed Silicon Valley Bank, another California bank, met its fate. Finally, Signature Bank in New York collapses over the weekend.
As a result, investors and depositors around the country, if not the world, are anxious. Are these failures isolated? Or are they a flock of canaries in the proverbial coal mine? As with most things, the truth is probably somewhere in the middle.
While hindsight is always 20/20, a cursory review of their balance sheets suggests these firms didn’t manage their liquidity as well as they could have. Unfortunately, they are probably not the only ones.
On the flipside, the data for the entire banking system shows there is still a lot of cash sloshing about the system. While perhaps it isn’t as great as it was 12-months ago, there is sufficient liquidity in the sector to avoid a larger problem.
The end result will be a slight slowdown in lending throughout the financial system, as a whole. However, it will not be the collapse that the system experienced 15 years ago. We have to remember the underlying cause of the previous panic compared to today.
In 2008, the financial system almost collapsed because borrowers couldn’t repay their loans. As a result, bank assets were permanently impaired. In 2023, higher interest have caused bond prices to fall. However, IF banks aren’t forced to sell their securities, they can hold onto them until they mature at par.
In essence, unlike last time, banks will ultimately ‘get back’ their capital over time. It isn’t lost forever as it was back then.
So, while we have all felt some measure of déjà vu over the last several days, the current angst in the markets will probably subside when cooler heads prevail.
Please note, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as those of our Investment Committee, is subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the rest of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.