Bank Failures and Fragilities in the System
Category: Invest
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The financial landscape in the Western world is undergoing a turbulent phase, marked by heightened systemic and banking risks. Recent bank failures have further destabilised the market, prompting investors to reconsider traditional asset classes. One of the notable shifts in investment trends is the renewed interest in gold, a time-honoured safe haven.
The financial system in the West is grappling with several challenges. A combination of factors, including economic uncertainty, stubborn inflation and geopolitical tensions, has contributed to an environment of heightened risk. Central banks’ efforts to curb inflation through aggressive interest rate hikes have put additional pressure on financial institutions, particularly those with significant exposure to long-term fixed-rate assets.
Several banks have found themselves in precarious positions due to liquidity issues, deteriorating loan portfolios and operational inefficiencies. The collapse of prominent banks such as Silicon Valley Bank (SVB) and Credit Suisse has sent shockwaves through the financial markets. These failures underscore the fragility of the banking sector and have perhaps eroded investor confidence.
Recent Bank Failures
The failure of SVB was a significant event that highlighted the vulnerabilities within the banking sector. SVB, a key player in the tech and venture capital industries, faced a liquidity crisis exacerbated by a sudden spike in depositors’ withdrawals. The bank’s inability to meet these demands led to a rapid loss of confidence and, ultimately, its downfall.[1]
Credit Suisse, another major international institution, faced a series of scandals and operational missteps that culminated in its collapse. The bank’s exposure to high-risk clients and failure to manage internal controls effectively were critical factors in its demise. These events have raised questions about the robustness of regulatory frameworks and the ability of banks to withstand financial shocks.
Only a month ago, Philadelphia-based Republic First Bancorp was taken over by regulators. It emerged that the bank was doubly encumbered by declining deposits, coupled with an ailing mortgage loan business. The bank also failed to submit its accounts for financial year 2022, with the company citing ‘a failure to maintain adequate internal controls’. Ultimately, the bank and its assets were sold to Fulton Bank, which acquired 32 branches across Pennsylvania.[2]
Gold: The Safe Haven
In light of these developments, gold has re-emerged as a preferred investment. Historically, gold has been a reliable store of value during times of economic instability and market volatility. Its intrinsic value, limited supply and lack of counterparty risk make it an attractive option for investors seeking to preserve wealth.[3]
The renewed interest in gold is evident from the surge in its price and increased demand for physical gold from the investing public. Investors are also flocking to gold as a hedge against inflation and currency devaluation.[4] Additionally, the metal’s performance is less correlated with traditional financial assets, providing diversification benefits.
The gold price has leapt to new highs in the last two months, touching highs above £1,900 before trading back down towards the £1,850 level.[5] Demand has broadly been driven by central bank activity, with the People’s Bank of China recording its longest-ever streak of monthly additions to its gold reserves.[6]
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Notes
The contents of this article are accurate at the time of publishing, are for general information purposes only, and do not constitute investment, legal, tax, or any other advice. Before making any investment or financial decision, you may wish to seek advice from your financial, legal, tax and/or accounting advisers.
[1] - Gold Price Spikes Following Silicon Valley Bank Collapse (royalmint.com)
[2] - Here’s What Led To Republic First’s Collapse—The First Bank Failure Of 2024 (forbes.com)
[3] [4] - Investors Move Into ‘Safe Haven’ Gold, Data From The Royal Mint Reveals | The Royal Mint
