,

This is not 2008

,

Is it 2008 all over again? Should we be worried about the financial system collapsing?

Deep breath. Let's discuss.

On March 10th, Silicon Valley Bank (SVB), a bank catering to startups, closed its doors after it could no longer cover withdrawals. (1)

Days later, regulators also took over Signature Bank.

There's reason to believe a number of other banks may be in trouble. (2) Rising interest rates are hitting many banking portfolios hard, and weaknesses are emerging.

Should we be panicked about these bank failures?

No. Here's why:

Unlike in 2008, the affected banks are small in the context of the overall banking system.

You can see in the chart above how small the two failed banks are relative to other, larger financial institutions. (3)

They also serve high-risk niches. These banks have a lot of exposure to cryptocurrencies, startups, and other highly volatile asset classes. (4) Those risky assets can make them more vulnerable to bank runs and liquidity issues. Which is what we're seeing happen.

Will more banks collapse?

That’s very possible. Moody’s, a rating agency, reported that it’s watching several other institutions with potential problems. (2)

Some larger banks may be affected as well, but it looks like regulators are stepping in quickly to protect the overall financial system.

What can we take away from the SVB failure?

I think it's a good time for one of Warren Buffett's famous bits of wisdom:

"Only when the tide goes out do you discover who's been swimming naked."

What he means is that adverse conditions expose vulnerabilities and risky choices. Many strategies can look brilliant when markets are booming. You don't always know or appreciate the risks until conditions turn against you. Clearly, a number of institutions are finding that out.

I think there's a lesson here for us as well: When times are good, we might not worry too much about our income or our expenses. Or the risks we take in the market.

But when times get tough, we start appreciating the risks we've taken and the obligations we've taken on.

Understanding our actual tolerance for risk and our ability to withstand rocky times is absolutely critical.

It's very hard to do when the sun is shining and life is good. But it's a skill well worth developing because we can expect to experience bear markets, recessions, and uncertain conditions throughout our lives.

Markets are reacting negatively to the uncertainty (as they usually do), and we could see some new lows. Interestingly, while many financial stocks have been under pressure, the broader market as measured by major US indexes is still slightly positive on the year. My concern is whether regional bank weakness turns into reduced lending and consumer activity overall, which could finally tip us into an official recession. 

I'm also curious about Wednesday's Federal Reserve decision on interest rates, and particularly Chairman Powell's comments. Just two weeks ago, probabilities suggested another 0.50% hike in the continuing battle to dampen persistent inflation. However, bank failures⏤caused in part by rapid rate increases in the last year⏤could give Fed officials a reason to slow down the pace.

I don’t know how this situation will play out (no one does), but I’m watching closely and I’ll be in touch if I have any specific recommendations for you. Stay tuned.

In the meantime, if you are concerned about coverage through FDIC and/or have multiple accounts at different institutions, check out this calculator through the FDIC website. A good place to note that since FDIC's founding in 1934, no depositor has lost a single penny of insured funds due to bank failure. (5)

∞