Forget fancy accounting metrics. If you want to know if more banks will fail, the answer depends on confidence.
Of all the problems that led to Silicon Valley Bank’s (SVB) collapse, the factor that shoved it over the edge was depositors’ confidence…or lack thereof.
SVB was in trouble for months. It may very well have survived, however, if not for a bank run.
A bank run is when a large group of depositors withdraw their money from a bank at the same time. This typically happens when fears that the institution will become insolvent reach a tipping point.
That’s what happened with SVB. Enough depositors got spooked and they rushed to pull out their funds…to the tune of $42 billion. SVB couldn’t cover that amount, and the bank collapsed.
But here’s the dirty little secret…
No bank can survive a bank run.
That’s because the U.S.—along with just about every country in the world—uses a fractional reserve banking system. This system allows banks to loan out a certain percentage of the deposits on their balance sheets—including your money.
This typically isn’t a problem. If you want to close your account, you can easily withdraw all your money. The bank has enough cash to cover you.
But…
When a large group of people with significant funds all try to withdraw their money at the same time…that’s a bank run.
Bank runs can make ANY bank fail.
Since banks lend out a portion of their deposits, they simply don’t have enough money on hand to cash everyone out at the same time.
That’s why confidence is critical to the financial system. If consumers lose faith in a bank, they’ll panic and withdraw their money.
That’s what happened with SVB, and that’s what will cause other banks to fail.
That’s also what the government is desperately trying to avoid.
Antagonist’s Take
Be very wary of statements from government officials like Fed Chair Jerome Powell. To avoid more bank runs and therefore more bank collapses, they will say anything to instill confidence in American consumers.
The big question is, “Can we trust them?”
Recent speeches from Powell and Treasury Secretary Janet Yellen make me doubt it.
Both officials spoke at the same time last week, and their comments contradicted each other. That’s not exactly a confidence builder.
Here’s an excellent summary from The One Read:
Fed Chair Powell and Treasury Secretary Yellen’s contradictory messages sparked a market selloff on Wednesday. Both officials touched on the health of the banking sector in their meetings, but each with a starkly different resolution of the current banking crisis.
Wednesday afternoon, the back half of Powell’s FOMC press conference overlapped with Yellen’s appearance before a Senate subcommittee. Though markets tend to get turbulent around a Powell speech, this turbulence reached a new level when both Powell and Yellen spoke on the state of banks and how far the government will go to protect depositors.
Yellen began by announcing that, “We are not considering insuring all uninsured bank deposits.” But Powell, at almost the exact same time, answered that, “Depositors should assume that their deposits are safe.” As a result, the S&P 500 fell, rose, went back to unchanged then plunged again. Major indices all ended the day down.
Today, Yellen reversed her comments in further testimony to a House Appropriations subcommittee. Yellen, in a U-turn, declared today that “Strong actions are to be taken to ensure deposits are safe.” In short: it appears as though Yellen saw that her comments blew up the market and immediately changed her prepared remarks.
The One Read (emphasis added)
And if you need any more reason to interpret the Fed’s statements with healthy skepticism, check out its track record over the last 3 years:
I admit that it’s impossible for anyone to be 100% correct in their forecasts.
But when we consider the Fed’s dismal accuracy on top of its incentive to say anything to boost consumer confidence in the financial system, it becomes vitally important to rely on other sources to uncover the real story and data.
My goal is for The Antagonist to be one of those sources for you.
While I won’t be correct 100% of the time, I will always be committed to providing you with transparency, trustworthy data, and insights from multiple perspectives.
I hope I’ve succeeded in that so far. If not, please leave a comment below to let me know how I can make The Antagonist better for you.
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Sincerely,
Jason Milton