This week you’re going to hear a lot in the media with phrases like:
- GFC 2.0
- Bank run
- Systemic risk
- Loss of confidence
- And the classic, financial CRISIS!
First off, let me assure you of this: we are not at the pinnacle of a circa 2008-style global banking crisis.
Second, what is this all about?
To cut a long story short, last week a big bank in the US – Silicon Valley Bank (SVB) – was closed by the US regulator. The reason for this was because the bank had failed. The bank was in a roundabout way insolvent. Therefore, it was important for the regulator to ensure the safe and speedy closure of the bank and get money back to those who should get it.
The problem is that this particular bank’s typical customer wasn’t your usual saver/depositor. A lot (that is in excess of 90%) of its deposits were over $250,000 and with organisations. This bank had been the “friendly” bank for venture capital funds, Silicon Valley start-ups and small businesses.
That $250,000 number is important because the Federal Deposit Insurance Corporation (FDIC), the government entity that protects depositors, only insured funds up to $250,000 per depositor per insured bank.
This means that if you had $1.25 million with SVB, then $250,000 is insured and a million is not.
Thereby when the bank failed last week, you would reasonably quickly get your $250,000 back, but that million would get tied up in the winddown of the bank, sale of assets and timely resolution of money to creditors.
In other words, a bloody long time – if ever.
Significantly, SVB had something in the region of $140-odd billion in uninsured funds. Also significantly, some pretty large companies also had money at the bank. Roku (NASDAQ:ROKU), the streaming device company with a market cap of $8 billion, said that it had around 25% of its cash in SVB.
Circle, the organisation behind the USDC crypto stablecoin, said it had exposure of around $3.3 billion of its cash there. But reports are also consistently coming through that many small companies that might only employ a handful of people had money there too – which means a lot of smaller companies are going to struggle to make payroll, let alone any other business expense they might have.
Bear in mind, what I’ve just explained is the short version. (For another succinct but no less informative perspective, editor Eoin Treacy shared his thoughts on the matter over here at Southbank Investor.)
Is this the deal of the century?
All of this means that a large, multinational US bank that has a lot of liabilities to depositors cannot return their money.
In a normal bank failure that would mean the people with $250,000 or less get that back through the FDIC. And any figure above that, as I say, goes through the procedures of winding up the company.
That’s not the case when the central banks and government get involved.
You see on Sunday, the US Federal Reserve decided that it could not let depositors lose any of their deposits. The systemic risk and the risk of other bank runs and a loss of confidence in the banking system was an unacceptable outcome.
What it really means is that the US is going to backstop all deposits in deposit-taking institutions.
Furthermore, the UK government has also stepped into the mix and cut a deal with the one and only HSBC.
The Bank of England, The Treasury, the Prudential Regulation Authority and the Financial Conduct Authority all put their heads together over the weekend and arranged a deal so that HSBC could buy the UK arm of SVB for just £1.
That’s right, £1.
This was in order to protect all depositors’ money that was held with SVB UK. This means that if you’re a small business, such as a tech start-up in the UK, that held money with SVB UK, the BoE and Treasury just saved your bacon.
Now the initial reaction to all this might be, “Hoorah! The money is safe, thanks to the strength and safety of our regulatory overlords, government and central bank.”
In a sense, sure. But you really should be asking, why was money deposited in the bank ever at risk?
Surely if you have some cash and you stick it in a bank, you would expect at any time that you will get that cash back.
No, no, no. That is not how the banking system works. All of this nonsense about insured deposits, uninsured deposits, protected amounts, etc, is completely and utterly a by-product of a broken system to start with.
The start of the push for CBDCs?
Our entire global economy and banking system runs on what’s called a fractional reserve. That means that for all the money in the world, there is actually only a fraction of that held in actual physical reserves.
Thereby if we all wanted our money out of the banks all at once because we had lost confidence in the ability of the bank to protect our money, this would trigger a bank run.
This would mean that the bank wouldn’t have the money to give to us all.
Now that doesn’t sound like a fair system, does it?
But this is why we’re even talking about SVB and the issues therein. Because a bank can take your deposits, then lend out more money against those deposits, and then use more money to invest in assets that might appear “safe” but which actually end up being risky, thereby risking all the deposits in the bank… and we find ourselves once again in a mess like this.
There’s a deeper story here about how banks are run and the confidence in the entire banking system. There’s also a question as to why SVB failed in the first place. This will all come out more in the wash in the coming weeks.
But I would also hazard a guess that there’s possibly an element of pushing the system to the brink of failure, so that the central banks and regulators can step in and show everyone how much they look after you.
A gentle reminder of how important they are in your lives, and that all money from the central bank is the only money you can trust.
In short, make no mistake this will be used as further ammunition and a precursor for the absolute need for a central bank digital currency (CBDC). This is the game plan. This is how they coerce, control and command the entire monetary system.
This is where it all starts.
Until next time…
Co-editor, Fortune & Freedom
PS The UK market has certainly had an interesting few weeks… to say the least. Four record highs in the last four weeks for the FTSE 100 is nothing to sneeze at. My colleague Eoin Treacy has released a free four-part masterclass to show our readers how they could make the most of it. You should take a look before it closes later today, here.