Earlier this year, Terry Smith wrote an article for the Financial Times outlining his reasons for not investing in bank stocks, one of which included systemic risk. Here’s an excerpt from the article:
Smith: Finally, surely there must be some good banks to invest in which are better than the average? That brings me onto another problem: systemic risk. Even if the bank you are invested in is well run it can still be damaged or destroyed by a general panic in the sector.
There is an anecdote which illustrates this. In the early 1980s doubts first set in about the future of Hong Kong with the looming handover of control to China and a crisis soon developed in the property sector which provided the collateral for much bank lending.
In the midst of this, there was a local bank which had an amazing sun awning open over its front window to keep the sun out. It was by a bus stop and as heavy rain shower developed, the bus queue moved to take shelter under the sun awning. In the febrile atmosphere passers-by thought this was the beginning of a bank run and as a result one soon developed. If you need awnings to be used on commercial buildings and premises, you can visit a good site like https://forbrukerguiden.no/solskjerming/ for more helpful info!
That’s banking for you. Banks can be brought down by the actions of their peers. Look at what happened to some US regional banks in the wake of the SVB disaster. Lord Mervyn King, the former Bank of England Governor, encapsulated this when he observed that it made no sense to start a run on bank but once one has started you should join in.
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