Banking Crisis: Are Deposits & ETFs at Risk?

I think it’s time we finally discuss what has been going on over the past couple weeks in the banking sector and if there is any reason to be worried regarding the safety of your bank deposits or your investments in ETFs, single stocks or peer-to-peer lending.

I’m of course talking about all of this from the perspective of a European investor, as I myself am based in Austria.

Please don’t forget that none of this is investment advice, just my personal opinion based on my own experience as an investor.

Let’s begin with a short recap of what happened so far, not only in the US but in Europe as well.

What happened?

It all started with the Silicon Valley bank in the US, which made the mistake of investing a large portion of its customers deposits into long-term government bonds over the past few years, to earn some interest on them.

They purchased many of these when they were still paying very low interest rates barely above 1%. That in itself is fine, but here’s the issue: Since yields for US treasuries increased at record pace to 3, 4% or more over the past year, older bonds with a lower interest rate like the ones they owned were now worth less as a result.

By the way, the same thing happened to euro government bonds.

Normally, as long as you don’t have to sell those older bonds and as long as the US government doesn’t default on its debt, you still get back the full principal at the end of the loan term as well as interest payments twice a year.

Well, the worst case scenario happened:

• On March 8th, the bank was still in solid financial conditions according to regulators.
• Just one day later, on March 9th, there was a massive bank run, with customers placing withdrawal requests for over $42 billion within just 24 hours. As a result, the bank was forced to liquidate some of those bonds right away, resulting in significant losses.
• At the end of that day, the bank had a negative cash balance of nearly $1 billion and couldn’t cover its outgoing payments any more. This led to federal regulators closing the bank and taking control of it the following morning.

With over $209 billion in assets just a few months earlier, Silicon Valley bank was the 16th largest bank in the US, which means this was the largest bank failure since the financial crisis in 2008.

But here was another issue: Countless startups in Silicon Valley exclusively used that bank, with 94% of deposits being above the FDIC insurance limit – similar to our bank deposit guarantee, with the main difference being that it’s protected up to $250.000 in the US compared to just 100.000€ in Europe.

As a result, something unprecedented happened:

Instead of 94% of depositors losing money, the FED stepped in and guaranteed all deposits, no matter the amount.

That same day, March 12th, the FED took over another bank, Signature bank, which was now the second largest US bank failure since the financial crisis.

With many small to medium sized banks seeing large withdrawals due to fear of more failures, the FED launched a major lending program for all banks, allowing them to get cash advances from the FED by pledging their treasuries, bonds and other debt as collateral, instead of having to sell them at a loss to meet withdrawal requests.

In a way, this means the money printer is back on, even while rates are still high:

Between April 2022 and March 2023, the #FederalReserve balance sheet declined by USD 626 billion.
Over the last two weeks, the Fed balance sheet has increased by USD 391 billion.

62% of QT has been erased.
I expect this asymmetric policy response during every downturn. pic.twitter.com/VJxnZ63dJM

— jeroen blokland (@jsblokland) March 23, 2023

Meanwhile, we almost saw a major bank fail in Europe as well, this time in Switzerland.

Credit Suisse was on the brink of insolvency, before being taken over by UBS for $3 billion, with the Swiss national bank getting involved and providing more than $100 billion of liquidity to help facilitate the deal.

And now people are becoming increasingly concerned about other banks as well, one example being the Deutsche Bank in Germany. Luckily, it doesn’t seem to be in too bad of a financial position after all according to analysts, so we’ll have to wait and see.

Either way, this one is systemically relevant for the banking sector, so I’m sure governments would step in once again if necessary.

So yeah, the last few weeks have been pretty intense. And if I had to guess, I don’t think we’re done with the banking crisis quite yet.

Are Bank Deposits, ETFs and P2P Loans at Risk?

So, what now? Should you be worried about your bank deposits and your investments in stocks, ETFs and P2P lending? Here’s my take.

Bank Deposits

Let’s begin with bank deposits, ie. cash in euros. The bank deposit guarantee in Europe protects your funds up to a maximum of 100.000€ per account at each bank, so in my opinion as long as you’re below that amount, I don’t believe there’s reason to worry.

Nonetheless, you could still be in an uncomfortable situation if your bank fails, as you might need to wait for a few weeks before regaining access your funds.

As a result, I would make sure to keep a few hundred euros in cash at home for living expenses and emergencies and potentially open a second account (preferably a free one) at another bank, which you could use if needed.

In case you’re interested, I have several bank accounts myself which I opened over the years:

The ones I use the most are a pretty standard, boring Austrian bank account for general bills like our rent, Revolut for fast transfers, when traveling and for purchases in other currencies and Trade Republic to earn 2% interest on my cash.

Ok, I can’t actually use the last one the same way I would use a bank, I can only move money back and forth to my other bank accounts.

Still, it’s covered by the same 100k deposit guarantee, so I figured it was worth mentioning.

Stocks & ETFs

Now, what about stocks or ETFs? Are those at risk?

Well, they can certainly swing up and down in price as we’ve seen over the past couple of weeks.

But the most important thing is that these securities can not be touched in case of bankruptcy, as they are held separately from each broker in custody exclusively for you.

Customer-owned, fully-paid securities are protected in accounts at depositories and custodians that are specifically identified for the exclusive benefit of customers. IBIE reconciles positions in securities owned by customers daily to ensure that these securities have been received at the depositories and custodians.

Client Protection at Interactive Brokers

This is why high net worth individuals with cash reserves over 100.000€, the limit for bank deposit guarantees, actually keep those in bonds instead of cash. Bonds are securities as well, just like stocks and ETFs are. This means that once again they exclusively belong to you and they are segregated from the bank’s or broker’s assets.

Thus, in case of bankruptcy of a bank or broker, all the assets you have in the form of stocks, ETFs and bonds remain unaffected and can simply be transferred over to another brokerage account of yours.

The one risk in this scenario I do see is when share lending is involved, for example with the two brokers Degiro and Trading212. Even though your shares are lent out against collateral, there’s still a bit of counterparty risk in case both the borrower and the broker were to go bankrupt at the exact same time.

This is why I appreciate that there is no share lending by default on my two favorite brokers in Europe, Interactive Brokers and Trade Republic. And before some of you ask me in the comments, no there is no share lending on Scalable Capital, Smartbroker or Flatex either, three more brokers that I’ve mentioned before and where my wife and I have some of our ETFs.

If it was up to me, I would also pick physical ETFs that actually hold the stocks from whichever index they are covering instead of synthetic ones, which replicate the indexes performance via SWAP contracts. While the latter ones are collateralized as well, they carry some counterparty risk. According to UCITS regulation, this counterparty risk with synthetic ETFs is limited to a maximum of 10% of the fund’s assets, but it’s still worth knowing about.

To summarize, make sure you use a broker that

1. Is strictly regulated in Europe
2. doesn’t lend out your shares and that thus exclusively custodies your stocks, ETFs and bonds separately from the company’s assets (like the ones mentioned above)
3. and stick to physical ETFs containing the actual stocks if possible, to reduce counterparty risk with your investments.

If you do that, it doesn’t matter if your broker ever runs into financial trouble, you’ll maintain full access to your shares as they can simply be transferred over to another brokerage account of yours.

That’s a major difference to cash you deposit in your bank account, where you’re basically loaning your money to the bank itself, which then invests part of that money or lends it out to others to earn interest on it.

Which is why bank runs can financially bankrupt a bank within a record amount of time, as we’ve just seen.

Meanwhile, if 100% of investors were to remove all of their stocks and ETFs from what I consider to be the best broker in Europe, Interactive Brokers, the broker would remain financially stable:

P2P Lending

Ok, enough about stocks, what about P2P lending?

I think the banking crisis could be both good and bad for the sector:

• If banks restrict the amount of loans they issue to individuals as is happening right now, this means these individuals are now more likely to look for loans elsewhere, including the P2P sector. Since these borrowers would have previously received a loan from their bank, they’re most likely of higher creditworthiness and more likely to repay their loans on time than the average P2P borrower under normal market conditions. The same could be true for business loans.
• On the other hand, refinancing likely became a lot harder as well. For example someone might have taken on a P2P loan, hoping that he/she would be able to get a loan from a bank later on at a lower interest rate to replace it. However, the combination of central bank interest rates increasing at record pace and the current banking crisis now make this a lot less likely.

Ultimately, I think this is not the time to simply go after the highest interest rates and to take on excessive risk, but to instead focus on profitable, transparent lending companies wherever possible.

Since I try to do that already, I haven’t changed anything in my own P2P portfolio.

Conclusion

And that pretty much concludes my take on everything that has been going on over the past few weeks.

I generally don’t like to create posts and videos spreading panic as many others seem to do, the news have done enough of that non-stop for the past three years already and I doubt anyone needs more.

That’s why I typically don’t react to every little thing that happens, as that tends to lead to bad decisions when it comes to investing and I prefer to stay focused on the long run.

Still, I hope you found this post helpful.