How a Physiology major explains a Bank Collapse, and How Does it Affect My Investments? 

The Physiology of a Bank Collapse 

My undergraduate degree was in physiology, in which we looked at the mechanisms of why organs, cells, and systems in the body did things. Something happening results in downstream effects to the system and body as a whole. That is probably why in recent years I have taken to trying to understand the very complex organism that is the economic machine.   

There is much fear in the news surrounding the recent collapses of Silicon Valley Bank, followed by Signature Bank. These recent events are downstream effects of the COVID-19-induced recession. Here is my best attempt (as a non-economist physiology-major oral-medicinist) to explain what happened, and how it potentially impacts you down the road.   

The COVID-19 Lockdown 

Lockdown mandates in March 2020 in response to COVID-19 effectively shut down the economy. In response, the Federal Reserve (aka “the Fed” which is the Central Bank of the US) took a series of actions to stabilize financial markets and support the economy. Among these actions included lowering interest rates to near-zero and implementing quantitative easing programs (what most know as ‘money printing’). The goal of these actions was to maintain the flow of credit and liquidity in the financial system, prevent a credit crunch, and provide economic support to households and businesses during the pandemic. 

With the presence of cheap credit and infusion of almost $3.5 trillion into the US economy alone, all asset prices went up (e.g.: stocks, real estate, cryptocurrency).  Growth stocks, such as those of technology companies (e.g.: Zoom, Peloton, Tesla) went up to record levels. Most of these technology companies are in growth phases and do not make a profit and operate at a loss. 

As a result of the overheated economy, inflation measured by the consumer price index rose to a peak of 9.1% year over year in June of 2022. As a result, the Fed began rising interest rates in order to curb inflation (from Fed Funds Rate 0.08% in March of 2022 to 5% at the time of this writing in late March of 2023).  

The Anatomy of Banks 

The economy is driven by banks’ ability to provide a store of money and be a source of credit. Banks make money by loaning out money to customers (e.g.: individuals, business, governments, and institutions) and charging interest, using money deposited by other customers.  In the case of Silicon Valley Bank (SVB), most of their clients were unproven and unprofitable startup companies in the technology sector. With rising interest rates and the resulting slowing economy, tech companies burned through their cash reserves, decreasing their deposit balances in the bank and lowering the bank’s balance sheet. In addition, because of their aggressive lending practices over tech startups, there is also a concern over credit risk and bad debt due to these companies’ potential struggles to stay afloat. 

Furthermore, some of the banks’ money reserves are also invested in long-term US treasury bonds, which effectively are loans to the US government, paying out interest (e.g.:  a coupon rate) at the prevailing interest rates at the time of purchase. When interest rates rise, such as the past year, the values of bonds go down because one can purchase new bonds that pay higher interest rates. Thus, the value of the US Treasury bonds held in the banks went down, effectively further lowering their balance sheet. 

With concern over decreased balance sheets and credit risk, depositors were concerned over the solvency of the bank and withdrew their funds, which is known as a ‘run on the bank.’ This started a cascade that led to SVB’s demise. 

With the demise of SVB, other depositors of smaller regional banks were concerned over the same thing happening to their bank, effectively causing a run on other banks such as Signature Bank. 

Will this Affect my Investments? 

The natural next question is, are my investments in real estate still safe? For our existing assets, our team has protected bank accounts with large national banks and is enrolled into a system called Insured Cash Sweep (ICS), which completely insures our funds by the FDIC. 

We thoroughly believe that investing in profitable, cash-flowing, multifamily real estate is still one of the safest options regardless of the current economic climate. 

• Housing is a basic need, yet a severe housing shortage remains in the U.S., hence there will be a continued steady demand and high levels of occupancy among apartments.  
• This persistent rental demand ensures that multifamily real estate investments provide consistent cash flow through rental income, which can help investors weather economic downturns.  
• Historically, real estate investments have been less volatile than the stock market, providing a more stable return on investment. 
• Development deals remain difficult to pencil in until hard costs pull back. Starts have already meaningfully declined, making our value add business model more attractive. 
• The data in Q12023 suggests a trend of normalizing rental growth. 
• Multifamily real estate continues to provide tax benefits, and hedges against inflation. 

Bank collapses, inflation and economic downturns provide greater reasons to place your hard-earned capital into resilient assets. In volatile times like these, would you rather place your money into the stocks of money-losing companies (which comprise a good chunk of the stock market), bonds that devalue with rising interest rates, or in assets that continue to be in demand, make a profit, and appreciate? The choice is yours. 

If you want to talk about how you can build and preserve wealth and generate passive income like the ultra-rich, set up a time to talk with me