Why banks are always in a crisis
The answer to the headline is very simple. The reason that banks will have crisis after crisis is that they don’t have enough money. Simply, they lend many times as much money as they have in deposits.
Why? This is simple too. They have to do something with your money so that they can pay your interest. (Cynics might say it is to pay shareholders and massive salaries.) This means taking risks – gambling it’s called in less polite circles.
But fear not. The banks have backers and these are called governments and any time banks get in trouble they will step in to rescue them. But it’s not governments really, it’s me and you. So whether you like it or not, you are gambler.
After the 2008 crisis, I am still the proud owner of shares in NatWest bank as the UK government still owns more than 40 per cent of it 15 years later. I don’t really want to own shares in a bank but, as a taxpayer, I have no choice.
After the 2009 crisis, I also had shares in Lloyds Plc but this company is now totally private…for the time being.
And I’m not a gambler.
The crisis occurs when people who have money in the bank decide they want it back and if people sense trouble they will behave like a mob and they will all want their money.
This is what happened with Silicon Valley Bank. Nowadays you don’t have to queue around the block – you simply take out your smartphone and in two seconds you can empty your account…if you’re quick enough.
Telling people to ‘keep calm’, as the CEO of SVB did, is the worst thing you can do – it scares people even more as he found out.
So, banks will always be in a crisis, but the government (me and you) will always be there to help them out so… long way round banks are the safest place to put your money.
Have a good week.