SVB Won’t Be the Last Failure. Banks Have $620 Billion In Hidden Losses

The biggest mistake any analyst or investor can make right now is to believe that the banking crisis is over. Veterans of such crises (and I include myself in that category) know that once the dominoes start falling, they keep falling until some government intervention of a particularly draconian kind is imposed.

We’ve seen some significant regulatory actions from the Federal Reserve, Federal Deposit Insurance Corporation (FDIC), the U.S. Treasury and the Swiss National Bank, but the fixes have been temporary and followed quickly by new failures. This will continue.

In the past two weeks, we’ve seen the sequential failures of Silvergate Bank (a bridge from the crypto world), Silicon Valley Bank, Signature Bank (another crypto conduit to the regular banking world), First Republic Bank, and the giant Credit Suisse.

Some of these were handled by regulatory intervention, others by private bailouts, and still others by central bank bridge loans. But in all cases, the target bank had either failed outright or was on the brink of failure.

What’s important to bear in mind is that crises of this type are not over in days or weeks. A slow-motion rolling panic that takes a year or longer is more typical.

The September 1998 financial crisis involving Long-Term Capital Management actually began in Thailand with a currency devaluation in June 1997. The September 2008 bankruptcy of Lehman Brothers was the culmination of a panic that started in the summer of 2007 with mortgage losses and a run on a French bank. That panic proceeded with the failure of Bear Stearns in March 2008, and the double failures of Fannie Mae and Freddie Mac in June 2008.

In other words, panics can run for a year or longer before they are finally squashed by massive regulatory intervention. Using that measure, the current crisis began in March 2023 with the Silvergate collapse and could run until early 2024 before matters are resolved.

Evidence of that likelihood comes in this article. It reports that unrealized losses on securities held by FDIC-insured banks exceed $620 billion. That’s the amount of bank capital that would be wiped out if the banks were forced to sell those securities to meet demands from depositors who want their money back. That would cause additional bank failures and continue the panic that began this month indefinitely.

Investors should reduce exposure to stocks, increase their cash allocations, and allocate up to 10% of investable assets to physical gold or silver as a hedge and as protection against a banking sector collapse. The time will come to return to the stock market. That time is not yet.

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