The implosion of Silicon Valley Bank, where the vast majority of account balances exceeded the $250,000 threshold backed by the Federal Deposit Insurance Corporation, prompted the government-backed company to secure all accounts at the firm last month in order to prevent additional bank runs. Signature Bank, which also had a majority of large account holders, imploded days later and produced additional concerns over volatility in the financial system.
Warren Buffett, the chief executive of Berkshire Hathaway, commented in an interview with CNBC that “we are not over bank failures,” but said account holders will never “lose money on a deposit” in an American bank and therefore should not be concerned.
“Banks have never cost the federal government a dime. The public doesn’t understand that,” the investor asserted, noting that the Deposit Insurance Fund is financed by fees on banks rather than taxpayer dollars. “You don’t need to turn a dumb decision by managers into panicking the whole citizenry of the United States about something they don’t need to be panicked about.”
Jeremy Grantham, the chief investment strategist of GMO, meanwhile remarked in a similar interview with CNN Business that the “best we can hope for” is the stock market shedding one-quarter of its current value. “Other things will break, and who knows what they will be,” said the investor, who famously predicted the dot-com crash in 2000 and the financial crisis in 2008. “We’re by no means finished with the stress to the financial system.”
Grantham admitted that specifically predicting the collapse of Silicon Valley Bank would have been difficult, but said forecasting a general burst in euphoria was far easier. “When the great bubbles break, they do impose a lot of stress on the system,” Grantham said. “It’s like pressure behind a dam. It’s very hard to know which part will go.”
Silicon Valley Bank sold long-term government securities and corporate bonds to fund withdrawals, causing the firm to realize heavy losses due to the higher interest rate environment. Grantham blamed Federal Reserve officials for causing the financial strain by previously implementing lower interest rates, which induce bubbles that “break and inflict a lot of pain” once rates eventually increase.
The Federal Reserve indeed warned that a mild recession would impact the United States in the second half of this year due to the volatility in the banking sector. Assets in the overall financial system are now $2 trillion lower than their book value due to the higher interest rates, according to a study from analysts at the National Bureau of Economic Research.
More than one-third of the 4,800 banks examined by the analysts would not be able to withstand all uninsured account holders attempting to withdraw their funds, while 186 banks would not be able to withstand half of uninsured depositors asking for their funds. Both scenarios presupposed that the banks would not be forced to sell their long-term assets at fire sale prices to cover withdrawals. The scenario of all uninsured depositors seeking to pull their funds is “likely too extreme, although not impossible once the news of a run spreads.”