By: Diana Bello Aristizabal
The recent collapse of Silicon Valley Bank and Signature Bank, which were shut down respectively by the Federal Deposit Insurance Corporation (F.D.I.C.) and New York regulators, left us with three questions: How should we react in times of uncertainty?, What strategies can we use for the future? And where is our money safer?
Answering these questions is vital given the wave of panic that arose over the banking turmoil, largely influenced by the fact that an extensive number of people pulled their money out of the aforementioned banks.
“One of the things that triggered what happened in March is connected with what followed after people heard rumors of solvency problems. As a response, they panicked and began to empty their accounts at the same time, leading to a bank run that ended up bringing greater losses to these institutions,” says Leila Pinto, lecturer at the University of Miami Herbert Business School.
But leaving this chapter aside, does it have any benefit for depositors to quickly withdraw their money out of the bank when hearing of a potential bank failure? The unison answer of the experts consulted is no.
“Most banks’ solvency issues develop within 24 hours. When we hear a rumor of this nature, it is best to remain calm and wait. If the bank is really in trouble, the Federal Reserve will step in,” says Pinto, who also serves as Director of the graduate finance programs at HBS.
A similar opinion is shared by David Andolfatto, Chair of the Department of Economics at Miami Herbert Business School. “We’ve had around 500 bank failures in the last several years. There’s really no reason to worry, especially considering that the F.D.I.C insures up to $250,000 per depositor/account.”
This is not the right time to invest.
Despite what recently happened, there is no better place to keep the money than in the bank. Nevertheless, we need to be strategic, and learn some aspects of the banking system as well as of the current market.
First of all, it should be noted that there is no way to predict when a bank is going to fail, nor are there guarantees of protection if the institution is larger or has more years of experience, although it cannot be ignored that this helps. “The problem with small banks is that they are not as regulated as the big ones,” Professor Pinto explains.
Another factor that, although not decisive, is worth considering is the risk rating of the bank where we choose to deposit our money. This information should be known as an additional preventive measure.
“The risk rating is important, but it must be taken with a grain of salt, because normally, agencies that dedicate to this are not immersed in the everyday life of the bank. Sometimes, they haven’t been monitoring their activity for the last six months, and now we know that even the strongest bank can fail at the face of a massive withdrawal,” she says.
Having said this, what really works is distributing the money in different banks and accounts. This means that since up to $250.000 on deposits are insured, in a family of several members, instead of keeping funds in one place, it is convenient to diversify them.
In this way, a married couple in which, for example, each one has accounts in three different banks, they would be covering a million and a half dollars. This is especially relevant for those who have more money than the average person.
“Usually big corporations know how to manage their money but the concern is around the medium size and smaller firms that have large payrolls and are growing. In that case, the strategy is to own several accounts each with smaller amounts,” Andolfatto says.
With regard to investing, the recommendation at this time is to refrain from doing so since the market is very unstable and, therefore, you have to opt for alternatives that represent the least risk.
“I do not recommend investing in anything that lists on the market. Both stocks and bonds may fall in the short term as interest rates recently rose and will continue to trend higher. Maybe the market changes in three months but for now you can lose money,” explains Professor Pinto.
It is also not prudent at all to buy gold coins that are used to speculate, much less bet on cryptocurrency, a market that both analysts say is the most dangerous one at the moment. “It’s a very volatile market in which you can make a lot of money but likely lose 50 percent or more of your investment in a very short period of time,” Andolfatto comments.
In the same line, investing in real estate is also not encouraged. This sector, taken as a refuge by many people in Florida for several years, will most likely experience a drop in prices due to the high interest rates, just like it will happen with other markets.
However, for Professor Pinto, starting a business is still a viable path, although if a bank loan is needed, take it in the short term noticing that interest rates are expected to fall in the medium term and this would only be beneficial for entrepreneurs. “Requesting a 10-year loan currently is not a good idea.”
For now, interest rates are expected to normalize a bit in a year’s time while inflation is contained. “Banks will have to work to repair their balance sheets to become more resilient in the face of the times ahead, but if you have your money in the bank, it will be safe there,” concludes Andolfatto.