As the dust settles from recent bank failures, it’s crucial for analysts and investors to resist the temptation to believe that the worst is over. History teaches us that once the first domino falls in the banking sector, the others tend to follow suit until robust government intervention steps in. Despite regulatory actions from authorities like the Federal Reserve, FDIC, U.S. Treasury, the fixes applied so far have been temporary, merely delaying the inevitable.
In the past fortnight, we witnessed the sequential failures of Silvergate Bank, Silicon Valley Bank, Signature Bank, First Republic Bank, and the colossal Credit Suisse. Some were rescued by regulatory intervention, others by private bailouts, and a few by central bank bridge loans. Regardless, the common denominator was that these banks were either on the brink of failure or had already succumbed.
It’s essential to understand that crises of this magnitude unfold over an extended period. Looking back at financial history, we see that crises such as the September 1998 Long-Term Capital Management debacle and the 2008 Lehman Brothers bankruptcy took over a year to unfold. The current crisis, initiated by the Silvergate collapse in March 2023, may well persist until early 2024 before resolution.
A recent report sheds light on the unsettling fact that FDIC-insured banks are concealing unrealized losses amounting to a staggering $620 billion. These losses represent the potential wipe-out of bank capital if forced to sell securities to meet depositors’ demands for withdrawals. Such a scenario could trigger additional bank failures, prolonging the panic that commenced this month.
In light of this grim outlook, investors are advised to take defensive measures. Reducing exposure to stocks, increasing cash allocations, and allocating up to 10% of investable assets to physical gold or silver can serve as a hedge and protection against a potential collapse in the banking sector. While the stock market has been resilient in the face of recent challenges, the prudent move for investors is to exercise caution and await more stable economic conditions before re-entering the market.
The storm may be brewing beneath the surface, and acknowledging the hidden losses within the banking sector is the first step in preparing for the potential turbulence ahead.
Sven Franssen