The very word strikes fear in people’s hearts today.

I don’t blame them.

Earlier this month, three U.S. banks collapsed in just a matter of days.

Over in Europe, UBS bought Credit Suisse for pennies on the dollar. The deal closed after Credit Suisse and UBS secured $108 billion in liquidity assistance from the Swiss central bank.

This sent shockwaves through the market.

Last Friday, one of Europe’s biggest lenders, Deutsche Bank, saw the value of its shares fall by as much as 14%.

With all this happening, you, too, might be wondering: Is the current banking crisis truly the next Lehman moment?

So, today, I’ll talk about the possibility for “contagion risk” throughout the entire banking sector. I’ll also discuss what you can do to protect your wealth with one, safe haven asset.

Is the Banking Sector Secure?

The answer to this question clearly depends on who you ask.

But most bank analysts agree that what happened with Silicon Valley Bank (SVB) and Signature won’t spread across the banking sector and cause a full-blown meltdown.

For instance, a recent note from investment banking giant Morgan Stanley said:

We want to be very clear here… we do not believe there is a liquidity crunch facing the banking industry, and most banks in our coverage have ample access to liquidity.

This can be summarized as: “With the banking sector now backstopped by the government, most banks will be fine. All large banks will be fine.”

If we go by that logic, the banking crisis we’re witnessing today isn’t a fundamental issue with how our financial system is run.

For one, experts say, SVB and Signature were both exceptions in the banking world.

Both banks served as key lenders to volatile businesses that needed cash quickly. SVB catered to tech companies and startups. Signature supplied crypto-related companies.

At each bank, more than 89% of the domestic deposits were uninsured. That is much higher than the average of 47% for American banks with $50 billion or more in assets.

A combination of those factors led to panic among depositors… and the resulting bank runs.

The Banking Turmoil Is an Issue of Trust

None of the above changes one thing, though…

What happened at SVB and Signature Bank could repeat if depositors get really worried about the safety of their money.

Credit Suisse is a case in point…

And, as I write this, Deutsche Bank looks like the next big domino in the process of collapsing. Like Credit Suisse, it has been on shaky footing for months.

Last Friday, the German lender’s credit default swaps shot up above 220 basis points (or 2.2%) – the highest since 2018.

A credit default swap is a financial product that acts like insurance for corporate bonds. When the cost of insuring a bank’s debt goes up, this means there are concerns about its stability.

French banks, like Societe Generale and BNP Paribas, are also in trouble. Just earlier on Tuesday, their Paris offices were raided by authorities on suspicion of fiscal fraud. 

So, we’re clearly past the point of this being just a regional-bank problem.

In fact, here’s what rating agency Moody’s wrote in a note last week:

[I]n an uncertain economic environment and with investor confidence remaining fragile, there is a risk that policymakers will be unable to curtail the current turmoil without longer-lasting and potentially severe repercussions within and beyond the banking sector.

And I agree.

Our institutions operate within a system that’s built on confidence.

To say that this confidence has been wavering would be putting it mildly.

So much so, the lack of trust in banks has already cost governments nearly $420 billion to keep our financial system afloat.

On top of that, banks borrowed nearly $153 billion from the Fed recently. This shattered the previous record of $112 billion during the crisis of 2008.

Banks also drew on nearly $12 billion of loans from the Fed’s new emergency lending program.

All in all, the Fed has already loaned $318 billion to the banks. That’s about half of what it loaned to the financial system during the entire global financial crisis of 2008.

More Banks Could Buckle Under Pressure

While bank analysts think recent events won’t cause a banking meltdown, I expect more contagion across the sector.

First, U.S. banks as a group are sitting on $620 billion in unrealized paper losses on government securities.

That’s because when interest rates went from zero at the start of 2022 to over 4% by the end of that year, bond prices fell on the open market.

As I explained in a recent essay, any bank that bought these bonds before the rates went up saw a big paper loss.

And as we’ve already seen, those “paper” losses can become very real when a bank run occurs.

Put another way, it’s like banks are sitting on a financial time bomb.

Finally, let’s look at the Fed…

The central bank recently came out with a “joint liquidity operation.”

This means that the Fed is collaborating with other major central banks to bump up U.S. dollar swap activity from weekly to daily.

In other words, major central banks can now borrow dollars from the Fed more quickly.

The problem is, as I wrote to you in my recent essay on Credit Suisse, that’s exactly what happened in the fall of 2008, when Lehman collapsed.

It’s a very bad sign for the private banking system.

Despite their reassurances, it’s clear that the Fed and other central banks are scrambling to prevent a banking crisis.

And that’s what makes the current banking crisis not just an SVB or Credit Suisse problem…

Now, the contagion won’t affect banks the same way that the 2008 financial crisis did. Today’s banks have much more capital and are better run.

But there’s one thing that happened this year that didn’t happen in 2008.

And it involves the speed of our advanced, digital age.

As PBS put it, the SVB situation “… was a bank sprint. It wasn’t a bank run.”

That’s because depositors were able to move large amounts of money at the tap of a smartphone key or click of a mouse.

According to the Federal Deposit Insurance Corporation, customers withdrew about $40 billion – one fifth of SVB’s deposits – in just a few hours.

Plus, various bad actors with big platforms spread panic on digital messaging boards and social media. So that broke down people’s confidence very drastically, very fast.

That’s another reason why we could see more banks buckle under pressure… big or small. And that will put the Fed’s faith in a “sound and resilient banking system” to the test.

What This Means for You

Either way, investors need to prepare for whatever happens next.

As I wrote in my earlier essay on the SVB woes, you should make sure your deposits are FDIC-insured. You can find out which banks are through this directory.

But there’s another way to counter the banking crisis that doesn’t involve the banks at all. And that is by diversifying some of your money into an asset that has a long, track record as a store of wealth: gold.

That’s because during times of market volatility and uncertainty, gold benefits.

For instance, the 2008 financial crisis triggered a massive rise in gold prices. Between September 2008 and October 2011, gold soared about 170% to $1,900 per ounce.

Fast forward to 2023, and gold has been up by about 9% since the banking crisis started. In fact, just earlier this month, the price of gold broke over $2,000 per ounce for the first time in a year.

So no matter how the banking turmoil plays out, I recommend holding gold in your long-term investment portfolio.

A good way to get exposure is through a gold exchange-traded fund (ETF) like the SPDR Gold Shares ETF (GLD).

GLD is “physically backed” by gold. This means that GLD shares are linked to the actual metal sitting in vaults.

So, GLD is a great way to own gold without the hassle of storing it, transporting it, and keeping it secure.

The fund is listed on the New York Stock Exchange. So you can buy it through your brokerage account.

Happy investing, and I will talk to you soon.



Nomi Prins

Editor, Inside Wall Street with Nomi Prins

P.S. Just this month, the price of gold broke over $2,000 per ounce for the first time in a year. And I believe there is plenty more upside ahead…

That’s why, in my Distortion Report advisory, I recommended a company set to benefit from the gold rally. It mines at one of the lowest costs among its peers. And it’s growing – both organically and through high-profile acquisitions.

As I write, shares are up 4.5% since my recommendation last week. But as investors run to safety, I expect shares to trade at least 50% higher before the end of the year.

If you’re a paid-up subscriber, read that issue here. If you’re not paid-up yet but want to protect your portfolio against turmoil, go here to learn more about Distortion Report.