The recent failure of two prominent US banks, Silicon Valley Bank (SVB) and Signature Bank, has ignited concerns as to the resilience of financial institutions 15 years after the “Global Financial Collapse” (GFC) of 2008. SVB went into receivership on the 10th of March this year, and Signature Bank two days later.
The Great Depression
It was 4 term US President Franklin D Roosevelt who guided the country through the horrors of the 1930’s great depression with the establishment in June 1933 of the bank-funded, and government backed Federal Deposit Insurance Corporation (FDIC). This measure did much to reassure the public of the safety of their bank deposits and enabled resumption of needed credit flow.
Roosevelt also took the time to explain to the nation the basic dilemma banks faced. They were expected to provide investors with often risky, relatively long-term loans, whilst depending on reliable but short-term sources of funds. To make it work, they had to set aside sufficient funds to meet the needs of depositors wishing to withdraw their money, and to carefully manage their lending risk and profitability to forestall any investor-led run on their reserves.
Why did the market crash in 2008? It is likely that sensible lending rules were relaxed to increase profit. And it was not just banks that were at fault but Insurance companies, investment providers, mortgage lenders, and credit agencies. They all sought ways to boost their revenue, and selfishly earn larger bonuses for themselves.
The fall-out from the failure of US mortgage originator investment bank Lehman Brothers in March 2008 was horrendous, having flow-on effects to financial institutions around the world. It was the most severe market crash since the great depression and many retirees like me, who relied on their superannuation, had then to apply for a pension.
The Dodd-Frank Act
The Dodd-Frank Wall Street Reform and Consumer Protection Act was passed in 2010 by the then in office Democratic Obama administration. It sought to impose market regulation to prevent another such financial disaster. Architects of the legislation were Sen Christopher J Dodd (D-Conn) and Rep Barney Frank (D-Mass).
In the quest for more stable financial markets, the Act created legislated measures such as:-
- the Financial Stability Oversight Council. Companies that flouted prudent risk limitation rules, considering themselves to be “too big to fail”, could for example be broken up into smaller components with more adequate reserves.
- the Consumer Financial Protection Bureau (CFPB). Recognizing that the GFC was largely a consequence of large and powerful mortgage originators marketing overly expensive and risky mortgages, this authority sought to protect consumers from predatory lending practices, including credit cards and other forms of consumer lending.
- the Volker rule, which restricted financial institutions from engaging in inherently risky investments. such as speculative trading, creation of hedge funds, and private equity firms, together with regulation of derivatives such as credit default swaps at the heart of the infamous GFC.
- the Securities and Exchange Commission (SEC) Office of Credit Ratings, which sought to improve the accuracy of company risk ratings.
- a Whistleblower program rewarding whistleblowers with a bounty for successful litigation.
Implementation of the Act however drew vigorous and sustained opposition from many financial institutions. Donald Trump in his 2016 presidential bid promised to repeal the Act and on May 24, 2018, a watered-down version of the Act titled “The Economic Growth, Regulatory Relief, and Consumer Protection Act passed into law.
The Silicon Valley Bank, and Signature Bank Failures in March 2023.
Some Democrat politicians laid the blame for these bank failures on the Trump administration’s 2018 roll-back of Dodd-Frank Act. Oversight of mega-bank reserves by regulators had been relaxed, from a threshold of over $50 billion, to over $250 billion. Weaker regulatory changes in ordinary circumstances may not have been a problem, but cost pressures associated with inflation emanating from the Ukrainian conflict, increased the drawdown on reserves.
Significant too was the preponderance of risky loans in their portfolios. Silicon Valley Bank based in Santa Clara, at the southern end of the San Francisco Bay, become over-weight supporting the tech stock start-ups of Silicon Valley. On the other hand, the East Coast based Signature Bank evidently took on an unhealthy bias to risky cryptocurrency investments.
A focus on the vulnerability of Credit Suisse followed, heightening global concerns. Even Australia was motivated to closely check the creditworthiness of its banks.
Investment rumour, be it fake or factual, is available on the internet within literally milli-seconds. Equally rapid can be the movement of vast sums of money electronically, buying and selling stock, which threaten the solvency of even “too big to fail”. institutions.
Fortunately, the crisis also sparked support. President Biden immediately came out and reassured depositors their money was safe. Opportunistic rivals pounced on assets that now seemed temptingly undervalued. Governments are ramping up their fight against inflation and have refused to support investors who lost money on expensive assets. Furthermore, this scare is a warning to the rich and powerful barons of industry to curb their greed.
My Technical Analysis viewpoint
For Oldies like me, with limited residual savings to supplement their pensions, any loss of market confidence can hurt. All market sectors are vulnerable and with them, superannuation balances. As is so often the case after market falls, investors must choose whether to sell to stop further loss. The other side of the investment equation is to judge when it is safe to re-enter the market.
Technical analysis is a tool to follow fluctuations in market sentiment as situations like this evolve. I have chosen to comment on a six-month daily candlestick chart of the comprehensive All Ordinaries Chart provided to me by Incredible Charts.
- There was a 640-point, optimistic New Year market surge in January to a high of 7778 on February 3 at the start of the reporting period.
- The XAO then started declining. Blame can be attributed in large part to inflation brought about by the Ukraine War whilst several natural disasters have caused hardship and homelessness for thousands of Australians from massive property destruction.
- In six weeks from February 3 to March 20 and an index low of 7081.5, there have been eight bearish engulfing candlestick patters, warning of continued market weakness.
- The largest fall occurred March 10, the day that the Silicon Valley Bank went into liquidation.
- Three weeks later the fall has paused at a support level of approximately 7100 and, in the last two trading days, there has been an uptick in the index above support.
- At close last night (7236) the 120-period exponential moving average was 124 points higher, a safer entry point at 7360 for prospective buyers.
My suggestions and disclaimer
I wish to remind readers that I am not a qualified financial advisor, and therefore urge readers to seek customized professional advice when appropriate.
As a small, retired investor with modest objectives. I do not now hold any bank stock. I have a margin loan with Commsec, and maintain my loan obligation to an amount below my investment income which I monitor most days. My portfolio at present consists of only three quality income producing stocks. Each shows a profit on average purchase price.
My intent is to react to the present market weakness by further reducing indebtedness but retaining access to margin loan credit for acquisitions when it is safe to do so.
Categories: Chart Analyses
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