To The Moon

As governments & regulators in the 🌎 stabilise the 🏦 crisis, 🏦 stocks have stopped plummeting but recovery for 🇺🇸🏦 stocks have been choppy. Why is this so❓Since governments are clearly coming to the rescue🚑🚑, then why are investors still on their toes❓That’s because investors have the effects of a Bank Run🏦🏃‍♀️🏃‍♂️ & The Global Financial Crisis (GFC) at the back of their minds🧠 To understand why, let’s dive in deeper🕵🏻‍♀️

Most investors would associate the start of the GFC as the moment the great investment bank🏦, Lehman Brothers, collapsed on March 15, 2008⚡️⛈⚡️ However, Lehman Brothers was not the first 🏦 to collapse during the GFC, that 'honour' actually belongs to Northern Rock Bank in UK. On Sep 14, 2007, Northern Rock sought & received a liquidity support facility from the Bank of England (UK Central Bank) but customers lost confidence in Northern Rock & started a “bank run” to demand their deposits back from the 🏦 & caused Northern Rock to collapse, making it the 1st UK 🏦 in 150 years to collapse due to a lack of confidence leading to a “bank run”😅

🤔 What Is A Bank Run🏦🏃‍♀️🏃‍♂️❓

In order to understand the risk of a bank run🏦🏃‍♀️🏃‍♂️ we actually need to understand something basic & fundamental. We need to understand how a 🏦 creates money🖨💵💵💵 This is a simple example to explain a complex idea but suppose you have $100 of savings deposited into a bank. A bank does not have 100% of its deposits ready for immediate withdrawal by its customers. Banks only keep a “reserve ratio” of around 10% because generally, only 10% of deposits are actually needed to be spent by bank customers. So, in this case, since you have $100 in the bank, the bank only needs to keep $10 as cash & can loan out $90 to another customer. You still have $100 in your bank account and now another customer has a loan of $90. The bank has created $90 out of thin air💨💨💨⁉️

All this sounds crazy🤨🤨🤨, after all, how can a 🏦 create 💵💵💵 just like that❓Believe it or not, that is how a 🏦 works & the entire financial system is based on this reserve ratio of real customer deposits. The system works well in large banks because it is highly unlikely that every single customer would want to withdraw every single cent from their deposits. So long as the 🏦 has liquidity (enough cash for customers who want to withdraw their money), everything works well & the 🏦 grows, money is created in the economy & everyone is happy🥳🥳🥳. The risk occurs when 🏦🏦🏦 are not liquid, for example, Silicon Valley Bank (SVB) held a lot of 2-year treasury bonds that were thought to be a liquid investment but when customers demanded their deposits, the bonds had to be sold to increase liquidity at a huge loss leading to a weakened SVB that lead to a loss of confidence & this cycle of lower liquidity🔁 & lower confidence🔁 lead to SVB's fall.

If enough customers demand their money back from a particular 🏦, a 🏦🏃‍♀️🏃‍♂️ occurs & no matter how liquid the 🏦 is, it will fail… This is what happened to Northern Rock bank in 2007 & SVB in 2023. This is why when 🏦🏦🏦 are shaking, governments step in quickly & guarantee the value of deposits. In 🇸🇬, all deposits are guaranteed up to $75,000 & in the 🇺🇸 & 🇦🇺, all deposits are guaranteed up to $250,000. So if the 🏦🏦🏦 are shaky, customers with deposits up to these amounts don't have to do a 🏦🏃‍♀️🏃‍♂️ to recover their 💵💵💵💵❣️ 

🤔What’s The State Of The 🏦 Crisis Now❓

(1) We know that 🇺🇸 & Europe Big 🏦🏦🏦 will be safe as the respective governments will come to their rescue.

(2) There’s no immediate risk of the Big 🏦🏦🏦 collapsing but investors’ confidence have been shaken as they remember the previous 🏦🏃‍♀️🏃‍♂️ & the GFC.

(3) In the case of SVB & Signature Bank, Biden had announced that they will guarantee the full amount of deposits even beyond $250,000. This full deposit guarantee was not provided to First Republic Bank (FRC) but rather, the banking industry stepped in to improve FRC’s liquidity & restore confidence in the banking sector. FRC's improved liquidity means that they should not collapse now. In addition, now that SVB has been bought by First Citizen Bank, the risk of a 🏦🏃‍♀️🏃‍♂️ on any bank has dropped significantly, but investors are still on their toes as confidence has been shaken. 🏦 stocks will only recover when investors’ confidence in 🏦🏦🏦 recover.

❣️Hence, I would say the banking crisis is at Best On Pause mode⏸

🤔💭 How Can I Tell If 🏦 Stocks Will Plummet Again Or Go Into Recovery From Here❓

⭐️⭐️⭐️ Watch the next Big 🏦🏦🏦 earnings on April 14 & 18. Any signs of big losses, Any poor guidance for subsequent quarters, Any warnings for recessions will spark another sell-off❗️

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