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Hi.
Sorry for the offtopic post, but I figure in the context it's better to risk annoying some people than regretting that I didn't say something when it might have helped.
You've probably heard about the difficulties with Silicon Valley Bank, regional US banks and then Credit Suisse.
I think there's still too much of a focus on the direct effect of rising rates on the assets held by banks.
When the central banks drive interest rates too low then investors become desperate for yield and they persuade themselves that it's okay to take what seems like just a bit more risk it it will get them the return they need. It's not like an investor working for a conventional institution has a choice because you can take reckless amounts of risk for years and not get into trouble and after a while you just look like a fuddy duddy conservative guy who is out of touch with the times and at best you will get sidelined. I've seen this in the early 90s, in the tech wreck post 2000, in the credit bubble going into 2007 and again in recent years.
Cycles alternate, perhaps because memories are short but not that short and people obsess with avoiding a repeat of the mistakes that led to the last episode, completely ignoring the new risks that will cause problems in the next downturn.
So last time the problem was with residential real estate and I guess this time it will be in commercial real estate, maybe private equity and private funding of companies too.
There are two factors that go into the valuation of an asset - the discount/interest rate and the future cashflows (about which there's always a degree of uncertainty).
Commercial real estate means offices, shopping centres, storage and the like. Landlords buy a building, borrow most of the cost locking in terms (including the cost of borrowing) for a few years and then they sign leases for a few years. When the loan reaches maturity they need to refinance at prevailing rates and hopefully rents still cover the cost of financing if the latter has gone up and hopefully rents didn't go down and hopefully you can find new tenants to replace those that leave.
If on the other hand you can't cover the costs of the loan with rents then maybe you can work out something with the bank, but if not then you give the keys back to the bank (maybe your vehicle goes bust in the process) and now the bank owns the property and it can sell it for what it will fetch when it can find a buyer.
Because there's a cycle in lending and building there's not an even distribution through time of loans coming due. Lots of loans come due from 2023 for a few years and rates will be considerably higher because risk free rates rose a lot and the spread of the commercial lending rate over risk free rates also widened.
So the discount rate isn't looking good for valuations. Unfortunately neither are rental prospects. Many buildings are now half empty at best thanks to hybrid and remote working (and companies are going to start hiring remote more because access to talent is better that way - like I told my institutionally minded colleagues a few years back, no Goldman don't do what I am doing but I think they will be copying me in a few years).
Corporate tenants can't just get out of their leases because they don't want them anymore. I mean you can negotiate hardball - stop paying like Twitter did and force a conversation (and in future there will be many such cases). But ultimately it's a contract to which you are bound. You can sublet space and that will drive down the spot market for rents and as old leases come to expiry you can get out of your space that you no longer need. All this is happening when there's been a decline in quality of life in big cities but it hasn't really hit hard yet. I think it will continue and it will hit hard soon enough.
So I think there are going to be major problems in commercial real estate in the US and Europe and maybe elsewhere. There was a report from the European regulator on commercial real estate lending practices and reading better the lines of a carefully written report it made lenders seem like a bunch of buffoons who had abandoned the most basic disciplines of the field.
It's more than just that though - some of the banks most exposed to commercial real estate are critical in providing liquidity to the bond repo market and the repo market is the lifeblood of modern finance. If that seizes up there will be very big problems and even behemoths like JP Morgan may have some difficulties.
Mostly in 2008 nobody lost money in the banks that defaulted and people sort of assume that will be the case this time around. Unfortunately the authorities changed their approach. Their bluff will be called and what happens is uncertain but their intended policy is that deposits exceeding the insurance threshold won't be protected by that amount. It's about 85k per institution per person in the UK. That's not much for a business especially that has people to pay and the like.
Under conditions of uncertainty sometimes it's more about f(x) than x. In other words maybe it's very unlikely that you lose money held as a bank deposit or maybe it's quite likely. That doesn't make much difference to the right action because the consequences dominate the exact probability (which of course can never be known).
If you have money above the insured maximum in a bank then you might want to think about that. In the US you can put money with Treasury Direct in bills or short dated bonds (they might be late in paying if there's a technical default over the debt ceiling but I think they will be money good in the end). In the UK you can open up a national savings and investment account.
A business can open up an investment account and in dollars buy T bills, SHY ETF or in gbp buy gilts or in euros buy German paper. I'd avoid Schwab and keep an eye on the health of my brokerage.
Some people might want to own some precious metals. You can buy a physical ETF (platinum and silver are more volatile but cheaper than gold) or for larger sums buy precious metals and keep them in a vault.
Longer term the risk is inflation but right now I think the risk to having too high a bank balance isn't justified by the meager rewards.
Might be worth gently mentioning to friends and family too.
You know longer term we don't need banks - fractional reserve banking has truly become a vampire squid. You just need somewhere safe to make payments - and you already have services that do this, that don't speculate with your money - and there needs to be a way for lending to happen. Large institutions like Black Rock already do lending and we don't need banks for this.
European Banks are like 16x levered before derivatives. That doesn't take much of a downturn at all to completely wipe out their capital base.
