Many of you have been reaching out to ask my opinion on the recent bank failures and whether you should be concerned. As of the date of this article, the troubled banks are regional by nature in the U.S. and one large European bank. The word interconnectivity is very appropriate when discussing this banking crisis in 2023. The assets and liabilities are interwoven into many of the financial institutions and economic sectors here in the United States and around the world, creating the proverbial ripple effect.

The crisis

The troubled financial institutions are saddled with investments and bonds, many of which did not have hedges or options on these investments. As the Federal Reserve dramatically increased interest rates, the value of these instruments was reduced. This placed these institutions into a liquidity crunch, particularly as depositors with balances above the $250,000 FDIC insurance limit withdrew monies.

One could see this coming as the cryptocurrency and technology sectors, that were once hot, have recently crashed. There is an old saying that if it grows too fast it is a weed! The cryptocurrency, technology, and green energy markets were supposed to be the “next big thing,” accelerated by the media and the internet. Early investors did quite well if they sold their assets. Other investors that were followers failed to heed warnings of other bubbles that go way back to the tulip industry bubble centuries ago.

The troubled banks also financed many startups in the technology sector. Many of these businesses are struggling financially, which only adds to the bank’s portfolio risk. Fraudulent activities in the cryptocurrency market were ahead of the regulators. This convergence of events is creating the crisis. Take note that all of the stressed institutions have a financial liquidity issue. I have discussed in this column and at the Farm Futures Business Summit the importance of building financial liquidity and cash. Over the next few months, it will be interesting to see how the government regulators and the financial markets react. Could this be something bigger or just a proverbial bump in the road?

Ripples to agriculture

These bank failures can ripple to the agriculture industry, depending on the extent and duration. Expect the beehive of regulators to be stirred up, looking for potential cracks in otherwise solid agricultural credit portfolios. This means that lending institutions will have to step up the amount and detail of financial information in their loan files for internal loan reviews and external reviews by state and federal regulators.

Remember, in many cases, this will be a “green” set of lenders and regulators getting their first taste of financial adversity without government intervention or government bailouts.

How can you prepare?

We have seen bank failures before and a downturn or a recession will only magnify the outcomes. Stay tuned!