Using SVB as an example, it’s a good time to pause and reflect on five key points to keep in mind whenever the banking sector experiences a calamity, and banks start to collapse.

Given the niche industry focus of SVB within the US, it is likely that many merchants around the world were not directly affected by this specific bank collapse. Nor the one that occurred a few days earlier when Silvergate Bank, which services the cryptocurrency market within the United States, issued a public notice saying it would undergo voluntary liquidation.

That being said, traders and investors would do well to view the recent bank failures as signs of distress.

Below are five important takeaways for traders after a bank collapse.

Diversification

Whenever a massive hit like the one that just hit some banks in the US occurs, the first thing you should always check is whether your portfolio is properly spread across a wide variety of sectors and instruments. Otherwise, you will end up putting all their eggs in one basket, as happened to SVB, which was heavily exposed to the technology sector. Its collapse highlighted the risks of excessive concentration in a single industry.

Constant Monitoring of Economic Indicators and Market Sentiment

In hindsight, they say, it’s 20/20. In the aftermath of an economic crisis, whether big or small, it’s always easier to look back and identify all the signs that now, after the fact, seem obvious. That is why it is crucial to constantly monitor the health of a country’s economy, as well as market sentiment for the instruments and industries in which they are investing.

Understanding Regulations and Safeguards

Whether investors are choosing a broker or a bank, it is critical to review all regulatory laws, insurance clauses, and any other safeguards they have and are subject to. This is how money is protected and kept safe.

In the case of SVB, when it made its last call report in December 2022, the bank estimated that $151.6 billion of its total deposits were uninsured. Not surprisingly, what happened a few months later caused a great deal of panic.

Being Informed and Updated

In the aftermath of a major event, it is very important to stay up to date on news and developments related to it. What was the impact? How did the government react? What potential systemic risks to the broader financial system have been exposed? Is there a probability of contagion? Asking these questions and assessing the lay of the field after the crisis is critical to being prepared for any future events of a similar nature.

While the US government assures everyone that the collapse of SVB is not a premonition of another financial crisis like the one in 2008, traders and investors around the world are understandably on high alert.

Establishing a Contingency Plan

Portfolio diversification must absolutely be a priority for risk management strategy, even if there appear to be no signs of a crisis. However, when a major bank fails and an entire industry becomes nervous, then it becomes clear that the strategy must include a contingency plan. A typical example is setting stop-loss orders, to help minimize losses in the event of unexpected events or market movements.

After the SVB failure, anyone who trades indices, bank stocks, the US dollar and other assets would have done well to review the emergency exit plans they put in place.

By Audy Castaneda

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