Are Bank Stocks Too Risky?

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The recent failures of Silicon Valley Bank, Signature Bank, and First Republic and the poor performance of other regional banks serve as a reminder of the underappreciated risks of investing in bank stocks. It's not just the inherent banking risks that should make investors selective in buying bank stocks. The historical relative performance of bank stocks should also cause consternation for investors.

Fractional reserve banking allows banks, not the Fed or government, to create money. Banks typically have only an approximate 10% equity cushion supporting their assets. Such leverage creates bankruptcy risk if banks are not hedged properly for interest rate and credit risk. Bank stocks have underperformed conservative sectors and the broader S&P 500. Despite the broad risks, there are good banks that can be investment worthy.

Fractional-reserve banking

All money is lent into existence.

Read that sentence as many times as it takes to grasp. Its understanding is critical to understanding the U.S. banking system.

Despite what the media or financial pundits may say, banks, not the Fed or government, create money!