If you still have PTSD from the 2008 financial crisis, the events of the past week can’t have been very pleasant for you. With the 2nd- and 3rd-largest bank failures in U.S. history having just occurred, including the 16th-largest bank in the country, the fragility of the nation’s banking system is once again front and center.
Fifteen years after the last financial crisis, after we’ve been told for years there won’t be any more bailouts, after we’ve been told that the banking system is perfectly safe and healthy, we’re finding out what many of us had already suspected, that the banking system isn’t healthy. And for many Americans, it’s a sobering wakeup call.
While most Americans may not have held deposits at Silicon Valley Bank or Signature Bank, the risk of contagion spreading throughout the financial system remains. And now that banks have failed, the difficulties facing the financial system have taken center stage once again.
If you’re nervous about what’s going on, you’re not alone. Anyone who remembers what happened in 2008 is in the same boat. And one thing we’re determined to do is not to experience the same losses that we did back then. So have you crisis-proofed your investments yet?
The Fragility of the Banking System
The underlying fragility of the banking system in the U.S., and indeed around the world, is its reliance on fractional reserve banking. As the name suggests, banks only keep a fraction of the money deposited with them on hand as reserves, to cover cases of withdrawals or check clearing. They bet that enough depositors won’t attempt to remove their money, so that the bank can loan that money out or invest it and make money on those loans or investments.
The system works relatively well, until it doesn’t. And when it breaks down, you start to see bank runs and growing worries about the instability of the banking system.
In the U.S., banks have since March 2020 no longer been required to hold reserves against deposits. That facilitates a greater potential for making loans, but it could leave banks exposed in the event of a bank run.
The recently failed Silicon Valley Bank (SVB) was an example of a bank that, even though it was relatively conservative by banking standards still got caught up in the problem of fractional reserve banking. The bank’s holdings of securities lost value due to rising interest rates. How does that happen? Let’s illustrate, using Treasury bonds as an example.
The way that purchases of Treasury bonds works is as follows. You elect to purchase a certain amount of debt, let’s say $1,000. You elect to buy a bill that matures in one month. At the time of sale, you pay a price of, let’s say $995.85, which would be equivalent to an annual interest rate of about 5%. At the end of the month, that bond matures and you get paid $1,000.
The $4.15 is the interest you receive on that bond. And because you held the bond until maturity, you get the full face value of the bond ($995.85 principal + $4.15 interest). But between the time you purchase the bond and the time you sell the bond, its value can fluctuate up and down from that $995.85 purchase price.
If you find yourself in financial trouble within that month, you might find yourself forced to sell that bond to raise cash. And if the value of the bond has fallen, you’ll end up having to take a loss on that purchase.
Now let’s look at SVB and its Treasuries. According to media reports, the average yield of its bonds was 1.79% and the average maturity of its holdings was 6.2 years. So if the bank had been able to hold onto its holdings for several more years, it would have been able to recoup its money, plus interest.
But because interest rates have been climbing, the value of its bond holdings has been falling. The bank had no intention of selling those bonds, but it had to report the market value of its bonds, and report that it had “unrealized losses.” SVB’s unrealized losses were nearly $16 billion, almost equal to its $16 billion of capital. That was dangerous, and so the bank faced a potential wipeout if deposit outflows required it to sell securities.
Because of the underlying weakness in the tech sector which made up much of the bank’s customer base, that ended up happening, forcing the bank to try to raise billions more dollars in capital. After failing to do so, state regulators took over the bank and the FDIC swooped in to make depositors whole.
How Does This Impact the Banking System?
One interesting consequence of these failures is that the largest banks in the country are seeing major deposit inflows as depositors flee smaller banks. Apparently depositors think that these large banks are too big to fail. But are they?
Bank of America has $114 billion in unrealized losses, among the most of its large peers. Yet depositors are still rushing to give the bank their money. Apparently they feel that putting their money in the largest, most systemically important banks is the way to go, thinking that the government would never let those banks go under.
One of the most important takeaways from this incident is the fact that crises develop slowly, then happen all at once. Apparently the problems at SVB had already been noticed by analysts back in November, but it wasn’t until last week that most people began to act on that information. And once the deposit outflows started, it was off to the races. Within about two days, SVB was out of business.
That’s a reminder that crises like this can happen incredibly quickly, perhaps even before you’re able to react to them. That’s why it’s important to be prepared ahead of time so that you can weather crises when they occur.
With so many of the assets in our financial system today being digital, from bank accounts to stocks held in your 401(k) to shares of funds at your brokerage, the speed at which they can disappear seems far faster than it ever has. Imagine going to sleep at night thinking your money is safe in the bank, and waking up the next morning to find out that your bank has gone out of business.
Protect Yourself With Precious Metals
This is why so many Americans today want to invest in something tangible and physical. In a world in which so much seems fleeting and ephemeral, people are increasingly looking towards things that seem perpetual, eternal, and time-tested.
One of those things is gold, which has a long history as a safe haven asset and store of value. Its nature as a tangible physical asset continues to appeal to those who are looking for sources of value during difficult times.
Goldco offers its customers the opportunity to buy gold either through a gold IRA or through a direct purchase of gold and silver. With a gold IRA, you can roll over or transfer existing retirement assets from a 401(k), TSP, IRA, or similar retirement account into physical gold held within an IRA account. That gives you the safety and security of gold while still giving you the same tax treatment and tax advantages as your existing retirement savings.
If you prefer to hold your gold yourself and think that being able to hold your gold is the only way you can truly say you own it, Goldco also offers direct sales of gold and silver coins. No matter which way you choose to buy gold and silver, Goldco has options available for you.
With the U.S. economy and financial system facing increasing difficulties, now is the time to make sure that you have crisis-proofed your finances. If you’re worried about a repeat of 2008, call Goldco today to learn more about how gold and silver can help safeguard your wealth.
Trevor Gerszt is the founder and CEO of Goldco, a precious metals dealer in Los Angeles. For more than 20 years, Trevor has sought out ways to help people build long-term wealth through the security and stability of precious metals and other alternative assets. Goldco is A+ Rated by the Better Business Bureau, a 5-Time INC 500 Winner and has countless 5-Star Reviews for its quality customer service, dependability and strong reputation.
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