Bank Contagion Spreads: How to Guard Your Capital in a Financial Crisis
The effects of the failure of U.S. banking institutions Silicon Valley Bank (SVB) and Signature Bank have been felt internationally, leading to concerns that this may be an indication of a larger-scale economic calamity. Shares of Credit Suisse Group (CS), one of Europe’s top 20 largest banks by assets, plunged more than 32% in intraday trading, hitting a new all-time low following reports that the Swiss bank continues to see depositor outflows.
At the same time, the debt held by Americans has skyrocketed. The New York Federal Reserve reported that in the last quarter of 2022, credit card balances skyrocketed to a record-breaking high of $986 billion — a stark contrast to two years prior, when Americans were using stimulus checks to pay down their debt. This increase of $61 billion was a rapid reversal. The balance on auto loans increased by $94 billion. Bankrate reports that the proportion of credit card holders with ongoing debt has surged to 46%, up from the 39% recorded one year prior. Cox Automotive reported last month that auto loan delinquencies have been increasing since the pandemic's low point, with the share of auto loans at least 60 days overdue reaching its highest level since 2006.
Fears surrounding the future of the banks and the ensuing chaos causing lenders to secure their own financial reserves has resulted in evidence of higher stress within US dollar funding markets. This is exactly what took place with SVB. The bank allegedly lost $1.8 billion from selling its $21 billion bond portfolio in order to finance redemptions.
Last week, credit investors were highly interested in bank bonds. Tuesday's bounce in financial sector assets has not been enough to allay buyers' fears, which were heightened by the collapse of Silicon Valley Bank. Fears of a full-blown banking crisis will remain as long as the bond rally continues. Those investors who are focused on preserving their capital at this time should consider short-term Treasuries, as these bonds are less prone to volatility than those of longer maturities.
What I’ll let equity research strategist Lyn Alden explain because I don’t believe I would be able to do a better job than she does: Banks were given a ton of new deposits during 2020 and 2021 thanks to fiscal stimulus to people, and banks used those deposits to buy a lot of [Treasury] securities, which were low-yielding at the time.
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1. “Shrinking savings and rising debt leave consumers on shaky financial footing” msnNOW, 18 Mar. 2023, https://www.msn.com/en-us/money/markets/shrinking-savings-and-rising-debt-leave-consumers-on-shaky-financial-footing/ar-AA18MPlP
2. “Dash for Cash by Banks Fuels Signs of Tension in Funding Markets” Yahoo News, 15 Mar. 2023, https://news.yahoo.com/dash-cash-banks-fuels-signs-164625158.html
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4. “Credit Investors Shun Once-Hot Bank Bonds After SVB-Fueled Rout” Yahoo Finance, 14 Mar. 2023, https://finance.yahoo.com/news/credit-investors-shun-once-hot-182135112.html
5. “Bank Contagion Fears Spread to Global Markets: Time to Buy Short-Term Treasuries?” Investing.com India, 16 Mar. 2023, https://in.investing.com/analysis/bank-contagion-fears-spread-to-global-markets-time-to-buy-shortterm-treasuries-200571749