In case you are totally oblivious, Silicon Valley Bank (SVB) suffered a bank run over the past week and became a failed bank. It is a decently large bank that services tech and crypto start-ups and in a crisis developing over the past weekend, depositors were left in limbo.
In the end, the US government/ Fed stepped in to protect all depositors. Not exactly a bailout as it is expected that all equity and bondholders will be largely wiped out. So big difference compared to 2008.
Thoughts On Bank Regulations
This definitely sets a precedence. If you think about it, there has to be tighter regulations to prevent a bank’s management from degening and taking huge risks with bank deposits, knowing that the deposits will always be guaranteed by the government.
If left to the free market, I guess shareholders and bond holders would have to take the steps to sue management and make an example out of them. Whether it is irreparable reputational damage, clawback of salaries, bonuses or even criminal charges.
My bet is both will happen. Banks should increasingly be regulated like utilities and the range of actions by top management will become narrower. Poor decisions should also be punished with significant personal downsides.
The story is still evolving and I foresee will become a case study for the textbook in the future.
Thoughts On Bank Relationships In Singapore
In Singapore, The Deposit Insurance Scheme protects your deposits with a member bank for up to $75,000 per depositor per bank. Since there are easily more than 10 banks to choose from, one should not be keeping excessive cash with each individual bank, for prudence sake.
The only exception would be the three local banks. Remember a year ago when a few hundred OCBC customers were scammed and there was immense public pressure for OCBC to provide goodwill payouts? Not sure if other banks would have succumbed to this pressure.
In my humble opinion, deposits with the three local banks are almost pari passu with MAS T-bills. I fully expect the government to come out all guns ablazing to guarantee all deposits in the event of a bank run on a fractional reserve.
Thoughts On Asset Allocation
If you have a make it stash of $5m or more, it is increasingly rational to park half in cash deposits or short term T-bills yielding >4%. That should guarantee a very decent lifestyle.
Even parking $1m in these risk-free assets would yield >$40,000 over the course of a year.
The order is pretty simple:
- Short-term T-bills yielding ~4%
- Singapore Saving Bonds yielding >3%
- Local bank (3 of them to choose from) deposits if >4%
In light of what happened with SVB, there is really no need to venture to other banks for an extra 0.1% interest. The best counterparty is with the government. Next with the three local banks. And obviously in this high interest rate environment, there is no real need to buy any complicated investment products. Or long-term bonds that killed SVB.
If you want to take risk, do it with the other half of your funds and get uncapped upside. Whether it is more real estate, stocks or even crypto.
Thoughts On Crypto
I was closely following the updates on SVB through Twitter over the weekend and came to the conclusion that the US government was likely to be forced into a corner to guarantee the deposits at SVB. Otherwise, everybody will be pulling out deposits from smaller and weaker banks and transfer them to “too big to fail” ones like JPM or Wells Fargo.
Even if I wanted to, it was impossible to express my belief into a bet on the stock markets. Since it’s the weekend, markets are close.
Crypto is 24/7 though and in the end, it was either a bet on USDC re-peg or a simple long on BTC/ETH.
So even if you are a non-believer that bank runs and collapses are bullish for crypto, it at least proved to be useful to express a market opinion over the weekend.
Thanks for reading.
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