US Banks, Credit Suisse, and why NZ investors need not panic
by Nick Stewart
The saga of wobbly banks continues with the private-sector bailout of First Republic, which had lost another third of its already depressed value as at 17 March.
As a quick recap: This started on March 08 with the woes of ‘riskier’ financial instituions like Silvergate Capital, a crypto-focused bank which announced its intention to liquidate, and the now notorious startup-focused Silicon Valley Bank (SVB), which made a $1.8B loss on a bond portfolio after needing to raise capital. Of course, the need to raise capital made customers nervous as rumours of SVB’s failure spread on social media – prompting a run on the bank. The same snowball of withdrawals started to gather at Signature Bank, a 24-year-old bank mainly lending to real estate companies and law firms. Federal regulators seized the bank to stop this happening, but the unease and uncertainty is lingering in the US banking sector.[i]
Then Credit Suisse, a bank with a respectable 166 years under its belt, became an international casualty. Like SVB, Credit Suisse has suffered from poor management. Their longevity has been marred by a series of scandals: A criminal conviction for allowing drug dealers’ money to be laundered in Bulgaria, a spying scandal with a former employee, entanglement in a Mozambique ‘tuna’ bonds[ii] corruption case, and even a massive leak of client data to the media. Then there was their business relationship with disgraced financier Lex Greensill, where the bank failed to act in an adequate supervisory capacity and had to close four funds related to Greensill companies, leading to massive reimbursements to investors.[iii]
Credit Suisse was willing to engage with clients and behaviours that other banks simply would not, which was massively risky - not to mention illegal in several cases.[iv] A catalyst would have caused them issues eventually. It just so happened that talk of a global banking crisis (again, largely on social media) proved contagious, and made customers already distrusting of the institution pull their capital at this time.[v]
With respect to the last few years, the word ‘contagious’ in any context might make the average person leery. Financial contagion, especially, will be bringing back memories of the 2008 Global Financial Crisis (GFC). While the bank failures overseas are concerning, they do not equate to GFC part 2 just yet. While global markets may have a short term impact on your portfolio, international banks have less chance of impacting our banking system – so don’t go getting your life’s savings out to stuff under the mattress.
RBNZ has already made a statement to this effect, citing stress-testing on NZ registered banks. Yes, stress-testing is not just for would-be home buyers; the institutions must prove they can handle volatility too. And, according to RBNZ, they have (though it must be noted that while the most recent tests included scenarios of high interest rates, rising unemployment, a fall in house prices and a sliding shares market, they did not specifically test a run on the banks).
From RBNZ: "Our banks operate different business models that mean that they are not as exposed to the risks that have led to recent events."[vi]
Investing has inherent risks. And no matter what anyone tells you, there are no guarantees. But if you don’t have enough cash to live off for the rest of your life, what choice do you have but to invest? Control what you can control so you can set yourself up for success, and then give yourself some grace. Judge yourself by the quality of your decisions and not by their outcomes. There are so many factors outside your control that can impact investment returns.
I believe one of the worst things investors can do is to impose their memory on their view of markets. Because then they might “see” patterns that aren’t there and make choices that aren’t based on research or evidence. For example, jumping to comparisons between bank failures and the GFC.
Inevitably, when events turn bleak and headlines warn of worse to come, some investors’ thoughts turn to market timing. The idea of using short-term strategies to avoid near-term pain without missing out on long-term gains is seductive, but research repeatedly demonstrates that timing strategies are not effective. The impact of miscalculating your timing strategy can far outweigh the perceived benefits[vii]... as SVB found out when they had to pull their long-term bonds and take the loss.
When it comes to investing, the key is not to try to outsmart the market, but to understand how it works and use that knowledge to your advantage. The market is a great information processing machine. It runs on human ingenuity, which is why returns tend to grow over time as people work to innovate and improve the value of the companies they work for.[viii]
To make a long story short; stay in your seat, even if the ride is making you nervous. A robust, globally-diversified portfolio is constructed with fluctuations, corrections, and your long-term goals in mind. In particular, diversification can reduce the potential pain caused by the poor performance of a single company, industry, or country.
Don’t feel like you need to do something with your portfolio just because the headlines are getting loud. Research shows us that active investment is not a winning strategy over time. Rather than worrying about dips, think of the highs you can capture with the fullness of time – big picture, rather than today’s snapshot.
This is where a trusted fiduciary can come into play by creating a financial roadmap based on evidence, and offering unbiased advice to help you get your financial house in order – regardless of what’s in the news.
Nick Stewart (Ngāi Tahu, Ngāti Huirapa, Ngāti Māmoe, Ngāti Waitaha) is a Financial Adviser and CEO at Stewart Group, a Hawke's Bay-based CEFEX certified financial planning and advisory firm. Stewart Group provides personal fiduciary services, Wealth Management, Risk Insurance & KiwiSaver scheme solutions.
The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from an Authorised Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz
[i] https://www.nytimes.com/article/svb-silicon-valley-bank-collapse-timeline.html
[ii] https://www.theguardian.com/business/2021/oct/19/credit-suisse-fined-350m-over-mozambique-tuna-bonds-loan-scandal
[iii] https://www.cnbc.com/2023/02/28/finma-credit-suisse-seriously-breached-obligations-in-greensill-case.html
[iv] https://www.washingtonpost.com/business/2023/03/20/credit-suisse-what-s-going-on-and-why-is-cs-stock-falling/07e3b6b6-c714-11ed-9cc5-a58a4f6d84cd_story.html
[v] https://theconversation.com/credit-suisse-is-an-anomaly-why-australia-and-new-zealand-are-safe-from-bank-run-contagion-202126
[vi] https://www.rnz.co.nz/news/business/486196/rbnz-confident-nz-banks-ready-for-any-market-upheaval
[vii] https://my.dimensional.com/when-headlines-worry-you-bank-on-investment-principles
[viii] https://my.dimensional.com/people-have-memories-markets-dont
