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Bank failures, bank runs and other musings
March 10, 2023
10:23 am
AdrenalineTrade
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In case you weren't aware, there have been two bank failures in the United States in the past 24 hours., Silvergate (SI) and Silicon Valley Bank (SIVB). I would advise everyone to watch this very closely. A banking crisis can come out of a clear blue sky, and it just might have done so. Mid last year I decided to move my entire GIC portfolio, high six figures, to Manitoba, where all deposits in credit unions are insured, including accrued interest, without limit. It is possible that the fear of a banking crisis in Canada might just be enough to spark one. The smaller, virtual banks, in particular, could be where the panic starts, so I would advise everyone to ensure they have not exceeded CDIC limits. They might also gate withdrawals to prevent a bank run, so have some cash on hand. While this is unlikely at this stage, it is always better to be prepared.

March 10, 2023
10:32 am
AltaRed
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Somewhat over dramatic I think but the message is to avoid boutique financial institutions that have most of their eggs in one basket. The issue is not with broad based mainstream banks, but with niche banks like SVB that focused almost entirely on venture capital and tech investors.

BTW, I wouldn't trust a financially weak/small province like Manitoba (and its taxpayers) backstopping deposit insurance for the collective aggregate of assets on deposit of MB CUs either. A case of the pot calling the kettle black?

March 10, 2023
10:46 am
savemoresaveoften
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AltaRed said
Somewhat over dramatic I think but the message is to avoid boutique financial institutions that have most of their eggs in one basket. The issue is not with broad based mainstream banks, but with niche banks like SVB that focused almost entirely on venture capital and tech investors.

BTW, I wouldn't trust a financially weak/small province like Manitoba (and its taxpayers) backstopping deposit insurance for the collective aggregate of assets on deposit of MB CUs either. A case of the pot calling the kettle black?  

agree. If one is really worried about systematic risk, Manitoba is prob NOT the strongest province I would trust. Also think there are enough discussions on this site whether these type of guarantees are implicit or explicit.

March 10, 2023
10:51 am
mordko
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This is a good thing. We need froth to come off.

March 10, 2023
10:53 am
AltaRed
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Also, based on the limited reading I've done so far on the US situation, a problem some of the banks are having is poor asset/liability term matching that has drained capital.

Example: Having to pay higher rates on short term deposits while having low rate long term assets (loans) on the books. A bank cannot make money paying 5% on a one year CD while having a 3.5% 30 year loan outstanding. The market price of such long term loans is now well below face value resulting in large unrealized losses on the books.

March 10, 2023
10:55 am
Rail Baron
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Since many in this forum have savings in Manitoba credit unions, I'll add my layperson's assessment of the guarantee situation there.

The last time I reviewed the annual report of the Deposit Guarantee Corporation of Manitoba, which was last year, there appeared to be sufficient assets to cover the total failure of one big credit union in that province. These assets could also shore up more limited insolvency of multiple credit unions. But if multiple big credit unions were to fail at around the same time, then the DGCM would not have the assets to bail out all the depositors.

That seemed solid enough to justify my deposits in both Hubert and MAXA - split to diversify the risk that both credit unions would fail simultaneously. Perhaps I missed something?

March 10, 2023
11:11 am
NorthernRaven
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Remember, there are lines of defence before DCGM (in Manitoba) is putting in funds. The CU's capital, for one, would get eaten. A bunch of the residential mortgages are probably going to be CMHC insured if they were <20% down payment, and default losses on those aren't Manitoba's problem. The rest of the loan portfolio is still going to have value, impaired to whatever degree by whatever conditions are causing this hypothetical meltdown in the first place. I remember trying to figure out what it would take to blow holes in things so badly that the guarantee fund would be completely overwhelmed, and it didn't seem to be easy.

March 10, 2023
11:22 am
AltaRed
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I agree with NR it is never the full amount of liabilities (deposits) that need to be covered since there will be substantial assets to cover, in most cases, the bulk of the liabilities. The bigger issue tends to be the 'runs on the bank' where assets cannot be liquidated fast enough (and effective enough) to fund withdrawals. A collective run on MB CUs would likely cause significant problems.

March 10, 2023
11:28 am
Loonie
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It's a long time since I looked into any of this but I recall that the US has lots more small banks and that they are a less well regulated, and that they have more bank failures overall than we do.
Canada is generally known for its stronger banking system, as I understand it. Whether that is justified, I don't know. I don't think we ever know what is going on behind the scenes.

March 10, 2023
11:34 am
mordko
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In Canada its mortgages for people who couldn’t afford them and lied that seem like an obvious vulnerability. We know anyone who wanted a mortgage could easily lie and get one.

B-lenders and private lenders like Alpine Credits and First National might be exposed. Credit Unions… Don’t know. Online banks like EQ had a scare quite recently; surely they learnt the lesson. Large banks are very well capitalized and subsidiaries like Tangerine would only be allowed to fall under extreme circumstances.

March 10, 2023
11:37 am
Rail Baron
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Loonie said
It's a long time since I looked into any of this but I recall that the US has lots more small banks and that they are a less well regulated, and that they have more bank failures overall than we do.
Canada is generally known for its stronger banking system, as I understand it. Whether that is justified, I don't know. I don't think we ever know what is going on behind the scenes.  

Maybe it's better that we don't know what is actually going on behind the scenes. My involvement in business has shown me that it is rarely as pretty a picture inside the C suites than from farther afield!

March 10, 2023
1:02 pm
Loonie
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Yes, and "big" isn't necessarily better.
There was a news item recently about one of our large banks which operates in the US. I think it was TD. They received a large fine for an infraction in the US.

March 10, 2023
1:26 pm
canadian.100
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Loonie said
Yes, and "big" isn't necessarily better.
There was a news item recently about one of our large banks which operates in the US. I think it was TD. They received a large fine for an infraction in the US.  

Yes it was TD - the fine was about one billion $, I think. Since their annual profit is almost 40 billion $, I don't think it will affect them very much - maybe the exec bonuses will be a tiny bit less or they will not increase dividends to shareholders for a while.

March 10, 2023
1:52 pm
AltaRed
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Loonie said
Yes, and "big" isn't necessarily better.
 

True, but diversification is a fundamental key to strength, just like having a diversified portfolio. SVB was far too concentrated in the startup /venture capital business.

March 10, 2023
2:31 pm
Dean
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.

I call these days; 'Chicken Little Days'. sf-laugh

In this case ... when the Bad FI's drag the Good FI's down with them (in the stock market), it's time to go 'Shopping'.

Grab up those Good Deals, while you can ❗

    Dean

sf-cool " Live Long, Healthy ... And Prosper! " sf-cool

March 10, 2023
2:46 pm
Yatti420
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I am prepared for a system failure. Biden and Trudeau are doing a great job lol

March 10, 2023
4:38 pm
skibum
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All interesting reading. One thing I noticed was the FDIC insures up to $250,000 while CDIC has been $100,000 since the 1960's when very few people had that amount of money.

March 10, 2023
5:16 pm
icecreamyoda
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skibum said
All interesting reading. One thing I noticed was the FDIC insures up to $250,000 while CDIC has been $100,000 since the 1960's when very few people had that amount of money.  

I read that 97% of deposits at SVB are not insured by FDIC.sf-surprised

March 10, 2023
5:43 pm
mordko
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Thats because they are business accounts and tend to be large. Scary times for employees of said businesses.

March 10, 2023
6:12 pm
icecreamyoda
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mordko said
Thats because they are business accounts and tend to be large. Scary times for employees of said businesses.  

Yes you are right...but still a lot of personal accounts as well. There was a huge line-up outside a private bank in Boston today that was owned by SVB. I also saw a post on Reddit where a startup founder said he lost $2.8 million that he raised last month, and today he had to shut down and let go of all 11 of his employees.

The cruel irony is that SVB has billions -- but much of it is locked up in long-term investments, so they can't access it now. Shareholders will get wiped out. Depositors who are not covered by FDIC (which is most of them) will get some or maybe even much of their money once the liquidation plan is approved. But a lot of businesses won't be able to hold out for long...they have payroll and overhead.

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