CRISTINA OSMENA: Making sense of bank collapses

While this is not a personal finance column, the collapse of Silicon Valley Bank, Signature Bank, and the current distress of Credit Suisse (underway as I write this) must be the news of the week. And rightly so.

If anyone tries to tell you, including yourself, that these are isolated events, don’t listen. Bank failures cause their own contagion. Even if Silicon Valley Bank suffered the flaw of poor liquidity management and no risk officer for eight months, that failure has or will cause a subsequent liquidity contraction in the market. Loans will be harder to get, including personal loans and home equity lines of credit. If you were looking to do any kind of financing, except maybe a mortgage, you may have to wait out this crisis. And, if I am right and the loan market is closing as I write, then those who live on rolling over their own debt will be faced with their own challenges.

These problems are going to happen at the individual level but also at the company and larger entity level. That is what is happening at Credit Suisse. Funding, in this case equity, has dried up for the time.

The FDIC has decided to ensure all deposits of SVB, including those well above the insurance limit of $250,000. This is also true for Signature Bank and any other US bank of a certain size. If your money is in a small regional bank, take is out. I wouldn’t also discount the idea of having lots of cash around in case another weekend comes and things don’t work. Keep in mind that if the US government takes on enough risk, that means the next risk could be to the United States itself.

In short, the emotional effects of bank failures take on lives of their own. The biggest risk is that the contagion spreads to the country level. Less financially sound countries may be the next shoe to drop. The United States is even at risk. That, ultimately, is the biggest risk If the Fed sets the pace of interest rate hikes. Smart investors think that the singularity in the Treasury market happens this decade. You know, when those who buy US treasuries realize, like Wile E Coyote, that they are standing on a cliff of air and nothing is beneath them.