Banks are Not Safe: Why the Silicon Valley Collapse Should be a Warning for Everyone
March 25, 2023
The finance world was shaken by the rapid collapse of one of America’s biggest banks last week. Silicon Valley Bank (SVB) before its collapse was ranked 16th among America’s biggest banks. It served several venture-backed tech companies and witnessed exponential growth in capacity with the tech boom of the pandemic and immediate post-pandemic periods.
The bank grew from a worth of $71 billion in 2019 to a whopping $220 billion at the end of March 2022, tripling its assets within 3 years.
How did it happen?
Silicon Valley Bank rode on the near-zero interest rate of the pandemic era. It amassed a ton of US bonds to secure its assets at a zero percent interest rate. Coming to the post-pandemic financial turmoil, many of those bonds are at a loss as the Feds have hiked interest rates and inflation has eroded the value of bonds.
The bank announced that she had sold part of her bonds at loss and would be selling about $22.5 billion worth of shares to maintain solvency. This triggered a bank run among investors who withdrew their holdings out of panic. This cascade of events continued to take a negative toll on the company’s stock to the point of losing 60% in a single trading day and having a trading halt the following day.
What does this mean for investors?
Regulators moved in to shut down the bank and placed depositors under Federal Deposit Insurance Corporation (FDIC) regulation which protects investors up to $250, 000 of their income. The bad news is that more than half of their investors have more than these in holding. Although, the US government has come out to say every depositor and investor would get their money.
This does not take away the fact that investors in bank stock have seen a plummet in stock shares as a ripple effect of SVB’s collapse. Banks such as First Republic Bank (FRC) and PacWest Bancorp (PACW) had tradings halted after the shares plunged 65% and 52% respectively on a single trading day.
In Europe, the Stoxx Europe 600 Banks index, an index of 42 big EU and UK banks, fell 5.6% in the morning of that trading week — marking its biggest fall since last March. SVB’s wave also hit shares in Swiss banking giant Credit Suisse.
The peculiar risks with banks
Banks often woo customers with the guarantee of safety when they save with them, but like SVB’s collapse and many similar bank collapse in history, this may not always be the case. Storing your money in banks subjects you to several risks. They include:
Your money likely depreciates in value
Money saved in banks tends to decrease in value as time goes on. Inflationary factors are a constant threat to fiat currencies as they become devalued time after time to cushion the economic impact of inflation.
You want your money to appreciate and not just be in a bank where your capital depreciates as time goes on.
You are not protected from financial downturns
As seen with Silicon Valley Bank, money saved with banks is not protected from economic events. Silicon Valley Bank grew to a staggering $220 billion worth in March 2022. Fast forward to march this year and the bank is being bailed by the US government.
You are invested in unfavorable assets
Silicon Valley Bank invested its assets in low-yield bonds that underperformed following a hike in interest rates by the Feds. Bonds interest yield in march came in at 1.79% much lower than the 10-year treasury yield of about 3.9%. Many banks have similar investments in low yield-bonds or high-risk assets.
Offer you little gains on your capital
Several factors as earlier highlighted mitigate against the gains on your capital. Inflation erodes into your capital, and low-yield investments do not perform well against tightened measures to control inflation. These factors coupled with the threat of a bank collapse like that of SVB are risks to consider before putting your money in banks.
Little Control over your money
Investors, like in SVB’s case do not usually have control over the kind of assets in which their money is invested. This is one of the many factors that make saving money with banks particularly risky as many investments are unfavorable for the astute investor.
How can you secure your assets?
An astute investment strategy would be to reduce your assets in banks as much as possible. Diversify your investments by prioritizing inflation-haven investments such as Precious metal IRAs.
Precious metal IRAs are self-directed IRAs that offer protection against economic factors such as inflation and rising interest rates while having appreciable value on assets.
Investments in physical precious metals such as gold and silver have provided a sure haven during periods of great financial downturns as currently being experienced.
It is important to keep a tab of the financial market and to choose protective and wise investments such as precious metal IRAs to safely secure your savings.
A precious metal IRA is a sure way of keeping your assets safe and secured.
We are committed leaders in the precious metal industry and our brand thrives on trustworthiness. To begin the journey to safeguarding your retirement reach out to us at 888-503-1553 or fill out the form on the right side and get your FREE Guide for Investing in Precious Metals.