What does SVB and Signature Bank failure mean for farmers?

On Husker Harvest Days in 2021, a farmer asked me if the United States would shift its currency to cryptocurrencies amid the rapid rise of Bitcoin, Dogecoin, NFTs, and more. I dodged the question at the time because cryptocurrency was so hot and so new. And I didn’t want to invite cryptocurrency rage into my field – for obvious reasons.

But really, I was baffled that anyone would think that tying something as critical to the global economy as food exports to a relatively new, unstable, and unproven asset as actually a currency is not a viable economics idea. My suspicions have been proven correct with the recent bank failures of Signature Bank and Silicon Valley Bank.

Yesterday I was relieved when the US Treasury confirmed to the markets that federal tax dollars will not be used to bail out depositors at Signature Bank and Silicon Valley Bank. But having worked in the trenches as a lender ag in a previous life and belonging to a family of bankers, I think we all need a refresher on how we got to this point in the banking industry and why it’s important for all consumers – and farmers – moving forward.

A Brief History of Banking

the Glass-Steagall Law In 1933 he separated commercial banking (i.e. your operating line of credit and real estate securities) from investment banking (i.e. raising money for corporations, governments and miscellaneous institutions using large and complex financial transactions). Glass-Steagall also created the Federal Deposit Insurance Corporation (FDIC) after the devastating stock market crash of the late 1920s that led to the Great Depression due to rampant securities speculation.

What is the difference between the two? Capital reserves of commercial banks are required to use more stable securities such as bonds which are less likely to see risks in sudden changes in prices to maintain depositors’ balances.

The price of the Great Depression? GDP has fallen by nearly half Between 1929 and 1933From $104.6 billion to $57.2 billion (non-inflation-adjusted). It was disastrous and is increasingly fading from current memory as this generation goes on.

the Gramm-Leach-Bliley Law (also known as the Financial Modernization Act of ’99) repealed provisions of the Glass-Steagall Act that separated commercial and investment banking. The lower regulatory environment allowed commercial and investment banks to take greater risk with depositors’ dollars, which precipitated the Great Recession and the 2008 financial crisis. It also led to improved banking communication with customers regarding information-sharing practices (the silver lining!).

The 2008 financial and housing crisis was a direct result of bank executives taking advantage of the Gramm-Leach-Bliley Act. Essentially, investment bankers incentivized commercial banks to prey on low-income families and individuals, selling them adjustable rate mortgages. Then the investment bankers bought those subprime mortgages from the commercial banks, consolidated them into larger securities and traded them.

But when interest rates for homeowners went up, the payments became prohibitively expensive, and that caused the housing market and the entire financial system to collapse. As a result, more than $2 trillion worth (non-adjusted for inflation) has disappeared from the global economy, causing global GDP to contract by 4%.

the Dodd-Frank Act 2010 in the aftermath of the 2008 crisis to curb the risky lending practices that led to the financial meltdown. It also sought to boost capital reserve requirements for banks that ultimately played a role in last week’s crash.

since then Economic Growth, Regulatory Relief, and Consumer Protection Act In 2018, lawmakers worked to reduce lending and capital reserve requirements for regional banks (of a similar size to Signature and SVB) and try to weaken regulations that ensure middle-class consumers are protected from risky behavior on Wall Street.

How regulatory failures triggered the current crisis

Signature (5%) and SVB (7%) both had below-industry-average levels of cash (13%), which limited liquidity. SVB also had a higher proportion of fixed-income securities (55%) than the industry average (24%), which increased its risk because these securities are derived from debt products that are most vulnerable to value shifts amid rising interest rates. Additionally, 88% of deposits in SVB were not covered under the $250,000 FDIC insurance umbrella which is terrible wealth management customer service for any bank.

Translation: Signature and SVB made big bets on tech and cryptocurrency startups that have eroded in value as consumer spending dried up. They also relied heavily on debt-derived securities, which lost value as the Federal Reserve inevitably raised interest rates to quell inflation.

With the 2018 elimination of some Dodd-Frank capital reserve requirements for banks, SVB and Signature have managed to move away from capital reserve practices that so far clearly deviate from industry standards. These failures over the past several days suggest that the Dodd-Frank regulations must be revisited and strengthened if stability in the depositor banking industry is to be guaranteed.

About $100 million disappeared from the stock markets last week. SVB sold its $21 billion portfolio of securities (stocks, bonds, T-bonds, cryptocurrencies, etc.) $1.8 billion loss. The shady capital reserve structure of both banks and the investment of capital reserves in dubious assets (CRYPTO and other miscellaneous startups) is unlikely to translate into more bank failures – these were just two banks not managing current market conditions efficiently.

And friends – I have a low threshold for incompetence.

At the crux of the issue is this: Main Street banks are still suffering from the mistakes of Wall Street, even 15 years later. Electronic banking was bailed out in 2008, but millions of middle-class Americans have struggled to find jobs, pay rent, and build sustainable wealth. I had many of my college classmates struggle to find work during that time, so I saw firsthand how the mistakes of Wall Street could limit the financial future of an entire generation if not managed effectively.

I come from a family of bankers with a banking background – I am not naive about the plight of banking regulations. Commercial banks are subject to a more stringent level of oversight than their investment banking counterparts. But ensuring the financial viability of the middle class is a more sustainable economic option than allowing investment banks to make risky bets at taxpayer expense.

What does this mean for farmers?

The banking system is safe, and this event should not be a cause for any panic in the farm country. But it is an opportunity to improve your financial acumen and take a closer look at the financial institutions we rely on to support the businesses that support our families.

First of all, this raises questions about the certainty with which the Fed will continue to raise interest rates. “There is an old saying that the Fed raises interest rates until something breaks,” Nick Timeraus wrote for The Guardian. Wall Street Journal yesterday. “The biggest surprise over the past year has been that nothing has broken.”

The Fed balances its fight against inflation with financial stability. It remains unclear how the failures of the SVB and Signature Bank will affect the Fed’s rate hike, so all eyes will be on any comments made after the upcoming FOMC meeting next Tuesday and Wednesday.

For those who work with investors to lease land and/or take advantage of future ownership opportunities, ask to see their balance sheets. Question them on the capital reserve requirements of their organization and its structure. Ask to see our investors’ prospectus to see what they’ve been investing in recently and to determine if they’re in a sustainable position to face upcoming financial market volatility.

You don’t want to be left without access to a crop planted this spring if they’re getting their funding from questionable debt products, cryptocurrencies (“It’s something that affects the world and it shouldn’t be because it’s fictional.” – my insightful pair of crypto analysis) and NFT products or tech companies defaulted and suddenly dry up as interest rates continue to rise this year.

In the meantime, there are easier measures that can be taken. As more farmers seek to leverage working capital in favor of high-interest operating and medium-term loans, it may be wise to work with your bank to ensure that your deposit accounts are structured in such a way as to provide maximum protection Under the $250,000 FDIC deposit limit if you’re worried about the banking system (but again, you don’t have to).

If you feel moved, you can call your legislators and remind them of the importance of banking regulations that protect Wall Street from destroying Main Street (again). If you’d prefer a more curious point of discussion instead, you could ask them how much the big banks contribute to Latest election campaigns.

our January 2023 Farmer Futures Survey It found that farmers slowed grain sales in late 2022 even as commodity prices rose. But if the economy suddenly faces murky waters, commodity prices are likely to face headwinds soon. Even though futures prices have fallen recently, they’re still profitable — if you book sales now. An uncertain time may quickly approach and as always a bird in hand is worth two in the bush.