Did we Just Hear the Starting Gun for a Bank Run?

A bank vault
How much money is in your bank's vault? What about their balance sheet? Can they handle a bank run?

A company most of us have never heard of may be the canary in the financial coal mine. SVB Financial Group, also known as Silicon Valley Bank, lost more than $10 billion in market valuation Thursday (down 60 percent) as its stock tanked. After hours, it dropped another 22 percent as venture capital funds advised their clients to pull their funds from the bank.

The problem isn’t that this bank may suffer a loss of confidence, but that this could tip the entire financial sector over the edge. Every bank will now receive additional investor scrutiny, and those that have unrealized losses on their balance sheet could face a hit similar to the one SVB took. According to the Wall Street Journal, “the KBW Nasdaq Bank Index notched its biggest decline since the pandemic,” and the four largest banks in the U.S. saw their combined market value drop by $52 billion.

The Journal blames the problem on the Fed’s efforts to fight inflation. Don’t say we didn’t warn you.

What’s Next?

The largest banks don’t have as much to worry about, but this squeeze might force smaller banks to sell investments a loss to cover withdrawals and transfers. The more they liquidate, the worse their balance sheet looks, the lower their stock goes, and the less confidence their depositors have. That means more withdrawals, and the cycle repeats, with the bank’s financial position growing worse each time.

It will be interesting to see if the problems in banking spread to the broader financial sector. Banks aren’t the only companies with assets on their books that would sell under their book value. I’d worry about insurance companies, too. Let’s not even talk about pensions; this isn’t doing them any good. Then we have the auto finance companies, the mortgage companies, and a host of companies that have subprime or unsecured loans out there. Will they be able to survive this roller coaster as more people stop paying their credit card bills and miss their car payments?

If you think this is a wild ride now, wait until a recession hits. This could push us over that cliff. If the banks go bad, what does that say for the dollar? It could be the beginning of an economic collapse.

I’m curious to see if this problem causes other sectors in the stock market to fall. If so, will we see investors flee to gold, silver, or Bitcoin?

Any Action Required?

When the canary in the coal mine dies, miners would know the air is bad and they would back out the way they came. Does this SVB crash signal it is time to extract yourself from the hole you are in? That’s a good question to ask yourself.

Should you move your money out of your bank? Only if you have more than $250,000 on deposit with a single institution. Then you should spread it out, moving some of it to larger institutions. Or better yet, buy something tangible.

Should you consider increasing the amount of cash you have on hand? It can’t hurt. If we have an emergency bank holiday, you might need that cash to pay for things you can’t pay for when the money in your bank is inaccessible. Besides, why drive from ATM to ATM after the banks close, looking for one that hasn’t been cleaned out, when you can get the money you need now, with no waiting? It’s like bugging out; It’s better to do it a week early than a day late.

Speaking of bugging out, this doesn’t reach that level of concern. A bank holiday that stretches beyond three business days, or it gets extended beyond the announced re-opening day, would get me worried. I would consider it a very bad sign if businesses stop taking credit cards and the EBT cards stop working. If that happens, run for the hills before the riots start. You’ll be glad you got that cash so you can pay for your gasoline as you leave town.

UPDATE: On Friday, March 10, regulators took over SVB. See this story for details and this one for more on their last 48 hours.