“Beware of the Ides of March” - Certainly the middle of this March, a lot of gloomy occurrences in the financial market. FUN FACT: March 15th marked the time when Roman citizens paid their outstanding debts, sort of a “tax day” for the Roman Empire.
Over the past week a few regional U.S. banks were shut down as a result of a classic “bank run”, in which an overwhelming number of depositors, both individual clients as well as companies, lost confidence and decided to withdraw their funds. If there is one take-away to be mindful of, it’s that these banks, all miss-matched their investments with their obligations. It’s akin to say having all your personal money locked up in a 5-year GIC (because you get a higher return on that GIC than just cash), but then realizing you need some or all of that money to make sudden repairs to your homes. Of course, that GIC is locked-in and the penalties to liquidate the GIC substantial. On a personal investment level, this is why we are always asking during reviews if there are upcoming events or expenditures, so that clients are always in a position to access liquid funds, that aren’t as subjected to the markets.
More precisely, the banks in question this past week shared a combination of attributes: a clientele that was tied to certain industries like venture capital, a disproportionate amount of client deposits that was uninsured, bank assets that were concentrated in fixed income securities like government bonds with unrealized losses due to higher interest rates, and less stringent regulation compared to larger banks. While it seems that these measures will help stabilize the confidence in the banks, this is a big deal. Compared to 2008 when Lehman Brothers collapsed, and Bears Stearns sold, banks have borrowed a record high of US $165 billion from Federal Reserve backstop facilities in a matter of days. This has surpassed the US $112 billion borrowed during that financial crisis in 2008.
I will compare and contrast the US banking system with Canada’s in another piece, but bottom line, unlike many of the U.S. regional banks, the Canadian banks have a few advantages: a deposit, asset, and customer base that are all very well diversified, elevated liquidity positions, and high capital levels. Of course, that virtually all of Canadians banking is done through the 6 largest, federally regulated banks, has its drawbacks from a competitive perspective, it does leave them better positioned during periods of stress.
Don’t tell anyone, but I am in Miami for the March break (and have looked at the weather in Canada: ha-ha!). There is a big Baseball Tournament going on: the World Baseball Classic, and the finals are in Miami. I won’t attend as the ticket prices are silly, but I’m going to predict a Puerto Rico winner, which would please the substantial Latin America contingent down here.
A few weeks to go before our next WebEx presentation. We’ve had great interest in this, co-hosted with our commercial bankers. While I didn’t get much feedback on our first video blog, we hope to do more, and looking forward to hosting you. If you haven’t done so already, kindly RSVP on the invitation below.
Video Kingsmill's Investment Miscellanea / Invitation: