Fears of bank runs precipitating a broader financial crisis helped spark a surge in bullion buying this week.
The collapse of Silicon Valley Bank represents the second largest bank failure in history. While Treasury Secretary Janet Yellen insisted this week that the banking system is sound, many banks clearly are not in sound financial shape.
Signature Bank, First Republic Bank, and Credit Suisse, to name just a few, have run into serious trouble. In response, the Treasury Department, the FDIC, the Federal Reserve, and some mega banks have scrambled to orchestrate rescue packages.
Nobody wants to use the term “bailout.” But that's exactly what depositors are getting. Secretary Yellen announced that uninsured deposits at banks would be covered to guard against systemic risk. Effectively, taxpayers will be on the hook for losses caused by mismanaged banks.
Regulators fear a cascading loss of confidence will lead to massive withdrawal requests. And under our fractional reserve banking system, banks hold only a small percentage of cash to back all checking and savings accounts. That's why bank runs quickly lead to bank failures.
Account holders may think of their deposits as money in the bank. But in reality, their account statements represent IOUs from the bank.
Whether the bank can make good on its IOUs depends on how its portfolio of loans and other assets perform.
In the case of Silicon Valley Bank, it abandoned prudent risk management practices in favor of social objectives. SVB had no Chief Risk Officer from April to December of last year. Instead, it devoted company resources to boosting its ESG score and meeting diversity quotas.