Teetering banks spook investors

Are we headed for 2007, 2008, or something else? No one knows. Banks may look cheap, but are probably bargepole territory: much depends on where all this ends up.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Young Black woman using a debit card at an ATM to withdraw money

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Well, the tide has certainly turned.
 
And, as renowned investor Warren Buffett once remarked, it’s not until the tide goes out that you see who’s been swimming naked.
 
Silicon Valley Bank, for sure: the second-biggest bank collapse in US history. Signature Bank, certainly — the third-biggest such banking collapse in US history. First Republic Bank? Its shares are down 90% in a month, and are still falling. So yes, I’d say so.
  And, of course, Credit Suisse. The bank’s problems are longer-standing, to be sure. But the present climate doesn’t help. And so, it is being ushered into the arms of fellow Swiss banking giant UBS.

Who’s next? Where next?

With bank shares cratering around the world, suspicion is everywhere.

2007, 2008, or something else?

It’s only a few weeks ago that I was writing about the Footsie hitting a record high: for a few brief days, the FTSE 100 exceeded a level of 8,000.
 
The fall since then has been precipitous: as I write, the Footsie is just above 7,200 — a fall of 10%. That’s what bank runs and bank collapses do for investor confidence.
 
So what does all this mean for us investors — particularly, investors here in the UK?
 
Much depends on where all this ends up, and if a more general financial crash and ensuing recession occurs.
 
In other words, are we in 2007 (think the collapse of Northern Rock, and Bear Stearns liquidating two property-related hedge funds), and heading towards 2008 (the year everything else imploded)?

Or are we somewhere else — the 1990s, for instance, with isolated financial events (think the collapse of Long-Term Capital Management, say) that made markets nervous for a few months, but which didn’t bring about a more general crisis?
 
At the moment, no one really knows.

Passive income stocks: our picks

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

1980, anyone?

And obviously, I don’t know, either.

But I do think that kneejerk parallels with 2007-2008 are perhaps mistaken. They’re understandable — it’s the most recent severe financial crisis, after all — but mistaken.

Because essentially, 2007-2008 — before it spilled over into the general economy, as a recession — was about property values, and poor lending. The bubble inflated to the point where it could inflate no longer, then burst.

What we have today, on the other hand, is a situation of sharply rising interest rates. And back in the 1980s, we had exactly the same situation, when Paul Volcker — head of the Federal Reserve — began raising interest rates in late 1979, in response to soaring inflation.

Bank busts

The result was the so-called ‘savings and loan crisis’ of the 1980s and early 1990s.

America’s savings and loan associations were modelled on the UK’s building societies, and operated in a very similar way — except that they’d lend money not just on houses, but anything.
 
And by the end of the savings and loan crisis, over 30% of those institutions — some of them very sizeable — had collapsed. In all, 1,043 of them closed down: a mind-boggling number. The almost-inevitable result: recession, as a major lending source simply disappeared from the American economy. 

Mainstream risk

In part, it’s the lessons of the savings and loan crisis that lie behind the fears being expressed about America’s regional banks right now.
 
Regional banks that you and I have never heard of — just like we were only dimly aware (if that) of Silicon Valley Bank or Signature Bank — but which nevertheless create a big splash if they go under.
 
And if America’s regional banks start collapsing, the splash in the real economy — Main Street, in other words — will be significant. These aren’t banks catering primarily for tech start-ups or crypto firms: these are banks catering for mainstream businesses across America.

So what should investors do?

Wait, and play a defensive game, is my view.

Forget the lure of supposed bargains in the banking sector, for a start: bank stocks are hugely difficult to value, and bank bonds just as opaque. (Ask the investors who just lost £17 billion in Credit Suisse ‘AT1’ bonds.)

Too cautious a view? Ask renowned investor Terry Smith (of Fundsmith fame). A former star banking analyst, he refuses point blank to buy bank shares.

And be very, very cautious about bargains elsewhere, especially if those bargains were brought about by today’s market turmoil. Harking back to 2008 for a moment, the various bank bailouts and mergers on both sides of the Atlantic took place in early October that year.

At which point, the Dow Jones index had a further 37% to fall before hitting rock bottom. And the Footsie didn’t stop falling until February 2009.

Investing in AI: 3 Stocks with Huge Potential!

🤖 Are you fascinated by the potential of AI? 🤖

Imagine investing in cutting-edge technology just once, then watching as it evolves and grows, transforming industries and potentially even yielding substantial returns.

If the idea of being part of the AI revolution excites you, along with the prospect of significant potential gains on your initial investment…

Then you won’t want to miss this special report inside Motley Fool Share Advisor – 'AI Front Runners: 3 Surprising Stocks Riding The AI Wave’!

And today, we’re giving you exclusive access to ONE of these top AI stock picks, absolutely free!

Get your free AI stock pick

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

More on Investing Articles

Investing Articles

ChatGPT thinks these are the best stocks to buy for passive income. There’s 1 big problem

Is ChatGPT a useful tool for investors hunting for passive income from the stock market? Based on his little experiment,…

Read more »

Middle-aged white man pulling an aggrieved face while looking at a screen
Investing Articles

5 reasons I won’t buy Tesla shares today!

Tesla shares shrugged off Wednesday's underwhelming results as they continue to power upwards. But a sceptical Harvey Jones says he…

Read more »

Investing Articles

1 AI-powered growth share I just had to buy for my Stocks and Shares ISA!

Our writer reveals an exciting new company in his Stocks and Shares ISA portfolio that he thinks is poised for…

Read more »

Investing Articles

Why did this forgotten FTSE income share suddenly jump 21% in January?

Spirax Group is a top FTSE 100 income share, having hiked dividends for more than 50 years. It's made a…

Read more »

Investing Articles

I think now is the perfect time to consider buying high-yield FTSE dividend shares like Aviva

Harvey Jones has been loading up on FTSE 100 dividend shares over the last year or so, waiting for them…

Read more »

Runner standing at the starting point with 2025 year for starting in new year 2025 to achieve business planing and success concept.
Investing Articles

Scottish Mortgage shares jumped almost 15% in January. Time to consider buying?

Harvey Jones was delighted to see Scottish Mortgage shares end January notably higher despite all the fuss about cheap Chinese…

Read more »

Edinburgh Cityscape with fireworks over The Castle and Balmoral Clock Tower
Investing Articles

ISA millionaires love Legal & General shares – and so do I!

Harvey Jones was pleased to learn that Legal & General shares are top of the pops among ISA millionaires. Better…

Read more »

Close up of manual worker's equipment at construction site without people.
Investing Articles

Can the chancellor’s growth plans send these stocks soaring?

Expanding Heathrow and building a new cancer hospital are on the chancellor’s agenda. But which stocks could be set to…

Read more »