The media are being rocked by reports of the collapse of banks in the US and the fall in bank share prices in Europe. Are there increased risks for the Czech Republic and the portfolios of my clients?
What’s going on?
Credit Suisse’s long-term unhealthy management is not paying off. In the US, one bank has closed, two others are failing. How big a problem is this?
A similar pattern is not unusual in the US, we’ve just had a lull from these events for the last 2 years. In a situation where there was a flood of Fed money available in the US, it was virtually impossible to go bankrupt. For example, 157 banks failed in the US in 2010. What makes this exceptional is the size of the bank in question this year. The top 20 banks in the US don’t fail often, and when they do, it has dire consequences for the whole world. In this case, however, it is a highly specialised bank and so the direct global impact should not be large.
In essence, it can be said that nothing really special is happening in the US so far and it is a normal process of market recovery. Logically, however, this has led to increased distrust in the banking sector and greater investor caution in this sector. The biggest enemy of investors at the moment is investors themselves and their fear. Personally, I see the biggest risk in my estimate that the Fed cannot now continue to raise rates significantly, it would put other similar banks at risk and the US reserve banking system is currently essentially at zero.
Why is this happening and what is “Run on the Bank”
The way banks work is that the money that people put into them, they lend out. So they are never able to settle all withdrawals or transfers at once. Every healthy bank in the world can therefore be ‘put down’ if panic sets in and people want to withdraw their money en masse overnight. However, there are processes in place for such cases. For example, taking over the administration of a given bank or a deposit insurance scheme. In the US, these processes seem to have worked quickly and correctly so far.
(Source: Yahoo.finance.com; JPM = JPMorgan Chase & Co.; MS = Morgan Stanley; WFC = Wells Fargo & Company; GS = The Goldman Sachs Group, Inc.; C = Citigroup Inc.)
What impact could this have on us in the Czech Republic?
All clients who are aiming for their financial goals in the near term need not worry, the appropriate portfolio allocation we make and broad diversification will take care of minimizing risk. Any decline in the value of investments in equity funds or ETFs due to panic will then level out again over time when the panic subsides. Long-term instruments will absorb the situation over time. More conservative instruments will be minimally affected. Although I don’t want to deny some pressure on people’s cash as a result of high interest rates and thus the property market, if we are talking specifically about the Czech Republic.
The direct effects of the problems of the banks in the US and Europe mainly affect the people holding the investment instruments of the banks in question. Not so much us.
How do you perceive this, do you feel worried about the situation?