Dubai: If you’ve been following the news, you would have not only heard of the collapse of four banks in the span of just 11 days, but also been warned of more such collapses to come. But is there cause for actual concern?
Silvergate Capital was the first US bank to collapse, followed by US-based Silicon Valley Bank. Soon after Signature Bank became the third-largest bank failure in US history, which was trailed by Switzerland-based lender Credit Suisse. But are these four collapses connected in any way?
Amid widespread alarms on a looming global banking crisis, fears have also intensified among people about the risk that their investments could be facing in the near future. So if these fears are warranted, should you as an investor be doing anything different with your money? Let’s find out.
Lesson #1: Don’t trust the market for liquid cash during a crisis
What should you learn from the Silicon Valley Bank collapse? Newbie investors and retirees are often advised that if you are not in a position to keep a healthy cash reserves, avoid selling portfolio assets when the market is down. This was one of the key takeaways from the recent Silicon Valley Bank collapse. Experts refer to this as the ‘sequence of returns’ risk.
“It’s a valuable lesson for investors who may someday face their own cash crunch,” said Mohammed Shaan, a Dubai-based personal finance planner and investment advisor.
“It’s key to remember that you shouldn’t have to end up going to the market for liquidity. For example, if you need funds, it’s typically better to withdraw savings before selling investments in a brokerage account.”
Lesson #2: Even so-called safety of bonds aren’t reliable during a downturn
What should you to learn from the Credit Suisse collapse? Although UBS sealed a ‘rescue deal’ to buy peer Credit Suisse in a rescue effort to contain a banking crisis and stabilise financial markets, the deal only provided brief respite, as investor focus shifted to some of the underlying risks of the deal.
“There’s been a sudden loss of investor confidence in the financial system, particularly when the Swiss regulator decided that Credit Suisse debt with a value of $17 billion will be valued at zero, which left bond investors with nothing, infuriating them,” explained Anil Pillai, a UAE-based banking analyst.
“So while it’s important to understand that bonds are generally secure, it’s not always safe.” (Borrowers issue bonds to raise money from investors willing to lend them money for a certain amount of time.)
Also, Credit Suisse investors will merely get about 0.76 francs per share from the UBS acquisition of Credit Suisse – much lower than their closing price of 1.86 francs, which means that even though it was a ‘rescue deal’, it was a loss-making one from an investor’s perspective.
Lesson #3: Don’t invest in crypto-exposed assets what you can’t afford to lose, don’t borrow to invest
What should you learn from the Silvergate Capital collapse? Investing money you don’t have, known as leveraging, can be a strategy in the right hands but it is risky. This is particularly so in the case of FTX, which used its own cryptocurrency as collateral to raise loans, and for lenders like Silvergate Capital that have exposure to FTX.
Lesson #3: Don’t invest in crypto-exposed assets what you can’t afford to lose, don’t borrow to invest
What should you learn from the Silvergate Capital collapse? Investing money you don’t have, known as leveraging, can be a strategy in the right hands but it is risky. This is particularly so in the case of FTX, which used its own cryptocurrency as collateral to raise loans, and for lenders like Silvergate Capital that have exposure to FTX.
Lesson #4: Withdrawal rush can still hurt banks, so protect your wealth across multiple investments
What should you learn from the Signature Bank collapse? “The recent meltdown shows that banks still pose risks, and it shows us that the financial system is much more fragile than the public had been led to believe,” added Pillai.
“The danger plays out when a bank’s clients all wish to take their money out at the same time – known as a ‘bank run’ – a repeat from the global financial crisis. The truth is depositors never really know how safe their money is, and when fear starts to spread, depositors rush to get money out.”
Customers in bank runs typically withdraw money based on fears that the institution will become insolvent. With more people withdrawing money, banks will use up their cash reserves and can end up defaulting. This is why financial planners advise investors to protect your wealth across multiple investments rather than just relying on your cash accounts.
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