It has been a wild few weeks for investors in a range of U.S. banks. The collapse of Silvergate Capital (NYSE:SI), SVB Financial (NASDAQ:SIVB) and Signature Bank (NASDAQ:SBNY) was enough to create serious volatility in top bank stocks recently. Now, this weekend’s buyout of Credit Suisse (NYSE:CS) by UBS Group (NYSE:UBS) is the latest shockwave to ripple through financial markets. The long-established Swiss bank will be changing its banners after more than 160 years in business.
Today, significant volatility in other regional banks — including First Republic (NYSE:FRC) — signals that these rather widespread bank runs may not be over. The experts appear to agree, too. Recent reports cite the potential for nearly 190 banks to meet the fate of SVB.
Let’s dive into what to make of this news.
Are Bank Stocks Investable Right Now?
Much of the allure of bank stocks revolves around the business models of these institutions.
Via fractional reserve banking, lenders are able to take deposits and lend out more than the assets they hold (creating money via debt). So long as all depositors don’t come asking for all their money at once, this system works. In fact, it has worked pretty well for major banks so far. You need only look at the balance sheet of any top-10 bank to see how profitable this business can be.
Unfortunately, many small or medium-sized banks took on riskier loans, however, investing their deposits in longer-dated government debt. That’s because this capital needed to be invested in order to pay out a return to depositors, generally in “safe” bonds.
With interest rates spiking, banks’ bond portfolios have taken a hit. Thus, in many cases, lenders are underwater with their bond portfolios. That means if deposits are pulled, they’ll be forced to realize their unrealized losses. That’s what happened with Silicon Valley Bank — and it could happen for nearly 190 more financial institutions.
Given that only $250,000 of deposits are insured by the Federal Deposit Insurance Corporation (FDIC), small businesses — many of whom have biweekly payroll in excess of that limit — have pulled their deposits and put them in larger banks. So, until there’s some sort of increased assurance from regulators that deposits are safe, Credit Suisse’s buyout may not be the last one we hear of this year.
Over the long term, banks have been a great bet. Investors who have picked the leading banks will likely see little-to-no ill effects from this debacle.
That said, I’m going to steer clear of smaller regional banks right now. They’re just not worth the risk.
On the date of publication, Chris MacDonald did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.