The recent volatility in the banking sector on both sides of the Atlantic was, like 2008, an important lesson in both resilience and diversification. However, unlike 2008, the pace at which money flowed out of banks revealed that, in the digital age where banking transactions can be made on your mobile device under the table seconds after you have heard a rumour, reaction time is extremely limited. An individual’s solution in turn worsens the overall situation.
For depositors, the intervention of governments (e.g. the US, UK and Swiss) and agencies such as the Federal Deposit Insurance Corporation (FDIC) removed risk, although investors in the impacted institutions themselves proved less lucky. At Credit Suisse, holders of AT1 bank debt bonds saw their entire investment of about $17bn wiped out.
The US emergency action to raise the depositor protection limit beyond the $250,000 to stem outflows from other banks, essentially limitless for those impacted banks, is a temporary fix and one which cannot be relied upon beyond this current situation. Those wider risks remain; the immediate storm has passed but it feels like a pause rather than an end.
Bank customers seem to agree. According to analysis by JPMorgan Chase in the two weeks since Silicon Valley Bank and Signature Bank failed, an estimated $550 billion moved from smaller and regional banks to larger and money market funds in the US. That is reflected in a Yahoo News / YouGov poll where 12% of Americans say they have taken money out from the bank “because of the collapse of Silicon Valley Bank,” and 18% say they are considering doing so.
During the Silicon Valley Bank ‘run’, the media covered several bank customer reactions both in the aftermath of their withdrawal or during their failed attempts. What was surprising was the number who held deposits well over the FDIC sum or had no other bank account in which to direct a timely transfer.
Those insights have provided a teachable moment with investors coming to the realisation that they held too much money in one account, were fully invested in only one bank, and were probably receiving little in return.
Market turmoil will always put money in motion; the trick is to find where to ‘park it’ without compromising on security or growth potential.
Just before the crisis hit SVB, Signature and Credit Suisse, Knight Frank published their 2022 Wealth Report which included analysis on a range of asset classes including art, cars, watches, wine, and jeweller. Leading the list were investments in art, that asset class increased in value by an average of 29% at a time when inflation in the US was 8%. The report a reminder of the track record of art in times of turbulence. We have written before on the effectiveness of an art portfolio as a hedge against inflation.
Neither the importance of diversity or resilience are news to Mintus.
Our founders are driven by harnessing the twin benefits of consistent returns and diversification of risk and making them more accessible through fractional art investment.
As the Knight Frank report shows, investing in art can deliver strong returns and a long history of category performance shows that art diversifies risk through the economic cycle. Those drivers are a factor for the 42% of wealthy investors surveyed by Mintus who include art in their portfolio.
Art also has a physical tangibility that is appealing at moments like this. It is an asset class you can look at, touch, trade and has a pedigree which provides almost unshakeable certainty. Art and artists may marginally wax and wane as they move in and out of favour, but they are unquestionably backed by institutions, collectors, and culture. Art will always have a place.
The Mintus opinion? Brush strokes over bank stocks every time.