On Friday, due to a sudden increase in deposit outflows and a failed attempt to raise equity, Silicon Valley Bank was shut down by US regulators. It’s called a bank run. Depositors literally “run” to the bank to take out their money. It might be a little faster these days in the digital age. How fast can you run to your laptop to click a few buttons to get your money out? It was a little different in the “old days”. Yes, U.S. banks are breaking on the Sunday Reads.
Everything happens faster in 2023. We can run a bank in split seconds. And news and fear travels at light speed thanks to the internet and social media. Here is a wonderful Twitter thread on social media risk, and from a key tweet within the thread.
But the reality is, the banking industry has to start adding this “social media risk” into their frameworks and find a way to get ahead and control the narrative, to avoid this type of situation from happening again.
Regulators shut Silicon Valley Bank (SIVB) on Friday and seized its deposits in the largest U.S. banking failure since the Financial Crisis (2008-2009) and the second-largest ever. And while SVB is the 16th largest bank in the U.S., it does not compare to the major U.S. bank behemoths, such as Citigroup, JPMorgan, Bank of America and Wells Fargo.
The bank did not manage the risks. In order to meet a surge in clients asking for their deposits, they had to sell longer dated bonds at a loss. As readers know, bonds have recently experienced one of their worst performing periods, ever. The bank got caught holding the long bond bag. There’s more on duration risk, later in this post.
What happens on Monday?
It is a major event, but let’s hope that cooler heads prevail and that any potential contagion is kept in check. Follow me on Twitter as I will be watching and reporting.
Bonds had a great week of course, thanks to the bank blowup in the U.S.
On Friday, bonds were explosive to say the least, matching the blow up at SVB. It gives us an opportunity for bonds to demonstrate what we call convexity; the ability of bonds to move up in price when stock markets go down in price. Here was some of the midday action on Friday. These are U.S. listed ETFs:
- iShares 20+ Year Treasury Bond ETF (TLT) +3.3%.
- iShares 10-20 Year Treasury Bond ETF (TLH) +2.9%.
- iShares 7-10 Year Treasury Bond ETF (IEF) +1.8%.
- iShares 3-7 Year Treasury Bond ETF (IEI) +1.2%.
- iShares 1-3 Year Treasury Bond ETF (SHY) +0.5%.
- iShares Short Treasury Bond ETF (SHV) +0.03%.
Keep in mind that the opposite reaction can and will occur when rates are rising and bonds are getting hurt in price. The longer dated bonds will create more losses compared to shorter duration bonds.
Over the last year TLT is down over 21%, while SHV is flat in price, and would have a positive total return when we factor in the distributions.
Risk and opportunity
And where there is risk, there is opportunity. Mohamed El-Erian suggests the big banks will benefit.
A snapshot on financial strength …
Spot the anomaly …
Perhaps the Canadian banks will present very good value as they get taken down in bank-run sympathy. Our “terrible” Canadian banking oligopoly (and sensible regulations) is looking pretty good this Sunday. I would love to see a run on Canadian banks – on Canadian bank high-fee mutual funds 🙂
Canadian mutual fund holders could move to a global all-in-0ne ETF portfolio and cut their fees by 95%. But they don’t. Wishful thinking I know. But that’s why this blog exists, and keeps running.
Canadian bank valuation
According to Darko Mihelic, an analyst at RBC Dominion Securities, the Canadian banking index’s price-to-book ratio – which compares share prices to book values (or assets minus liabilities) – fell to 1.47 on Friday. That’s below the average of 1.79 since 2010.
Still, the current valuation is merely in line with a shallow recession. Price-to-book ratios can fall to 1.2 when banks are under significant stress or even 1 – during exceptional uncertainty, aka full blow recession.
U.S. banks breaking bad update
The Federal Reserve and the FDIC said in a joint statement late Sunday that the latter will ensure all SVB depositors are fully covered. Taxpayers will not be on the hook for the rescue. Any losses to the federal deposit insurance fund will be recovered by a special tax on banks.
More Sunday Reads
On My Own Advisor Mark reminds us that
you need to reinvest any RRSP-generated tax refund you get back – otherwise you are losing out on the true power of tax-deferred investing
It’s the fraud prevention month weekend reads edition. That’s a must read and share as financial fraud is reaching troubling levels. Also on the fraud front, check out the Bruce Sellery podcast.
On Tawcan, Bob looks at top Canadian monthly dividend stocks.
On Findepence Hub, Kyle Prevost refreshes his 2021 post – on why Kyle can’t wait to not be a homeowner. Interesting thoughts indeed. While home ownership will typically be a better financial decision (net worth creator), it has do be done properly. Meaning, buying at a sensible price and well within your financial means (with lots of wiggle room).
Section 2 suggested:
2.) Renting is Simply a Better Financial Decision Than Buying – in 2021 Canada.
The week in review
We check in with the Dividend Hawk with his week in review.
On The Retirement Manifesto, Fritz examines running fast to slow down.
Retirement isn’t as different as you’d expect from the working years. Of course, there are major changes, but there are also a lot of things that stay the same. Things like being over-committed, and feeling the stress that time pressure can bring.
Unlike your working years, however, you have more freedom to adjust your approach to life in retirement.
Embrace that freedom.
Tame your tiger.
Run fast if you must.
Then, slow down.
As readers know we enter the retirement risk zone years before we retire. FiPhysician looks at asset allocation 5 years from retirement. That’s a very good post with some useful links. I’d agree that we can start to shape the portfolio for retirement 5 to 10 years before retirement. For most we may be able to start the moves just 5 years previous to our retirement start date. I have a video in the works, on this topic.
And on the retirement front, an 85-year Harvard study on the No 1 retirement challenge that no one talks about. Retirees don’t miss working, they miss the people.
To retire happy, invest in your relationships now.
More its and bits
I’m running out of time and space. There was so much I wanted to add this week, on what was keeping me busy – other than playing guitar and jamming with friends.
Why is there virtually no stress in the banking sector, and with Canadian mortgage holders?
We’re probably not going to 2%.
Post to folllow on this dividend achievers event.
And for a smile …
Thanks for reading. Have a great Sunday.
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