Silicone Valley Bank – Update

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As you may have heard last week, or over the weekend, US bank Silicon Valley Bank (SVB) collapsed over the weekend, largely the result of a bank-run.

What happened?

The timeline of events is roughly as follows:

March 8 – SVB sold about US$21 billion of securities (largely government bonds) from its portfolio, resulting in a US$1.8 billion marked-to-market loss. Company simultaneously tries to raise equity to fill the hole caused by the trading losses. Capital raise fails. 

March 9 – SVB shares fall by more than 40% after the company announced it had sold all of the available-for-sale securities in its portfolios. SVB CEO tries to calm clients. Whispers that SVB management are attempting to sell the company.

March 10 – prominent venture capitalists tell businesses to withdraw money from the bank. Shares in SVB halted from trading. US Treasury comments they’re monitoring developments carefully. California regulator shuts down the bank and appoints the Federal Deposit Insurance Corp (FDIC) as receiver – 2nd largest bank failure in US history. 

March 11-12 – US Treasury says they’re not considering a bail-out. FDIC begins to auction SVB for immediate sale, unsure if they will find a buyer. The Federal Reserve (Fed) and the FDIC start considering a bail out. 

March 13 – the US Treasury, the Fed, and the FDIC announce all deposit holders will be made good (even on amounts above $250k). Same will apply for New York bank Signature Bank. Liquidity facility opened by the Fed for banks who might need it to effectively remove risk of other bank-runs. 

What got SVB into trouble? 

  1. Concentration in one industry – ie. technology. Under industry stress given widespread layoffs, share price falls, and fall in crypto.
  2. Didn’t hedge the interest rate risk on their book, possibly because less than 50% of its deposits (very low) were lent out.  The rest were invested. 
  3. Fed hiking rates caused losses in their investment book (mostly government bonds).
  4. Whispers of investment losses and capital raise spooked deposit holders.

Has this happened before? 

US banks fail all the time given the significant competition encouraged in their market (vs Australia’s Big 4). E.g., there are over 4,800 banks in the US right now, down from over 8,000 banks pre-GFC, with approximately 7 US banks going under on average each year since 2012. 

What have authorities done to stem the risk?

Important to note, this morning (AEDT), the following has been resolved:

  1. The FDIC is insuring all SVB deposits (and that of another bank – Signature Bank) – immediate payment of insured deposits (ie. up to US$250k), and payment within a week to all uninsured depositors (ie. amounts over US$250k). 
  2. The Fed has opened a short-term funding facility for unlimited amounts (held against eligible collateral – using the par value of the collateral, rather than the marked-to-market value) for 1 year to provide liquidity to banks for calls on deposits.
  3. SVB being auctioned off to the bigger banks.
  4. SVB shareholders and unsecured creditors will not be protected.

Is there risk of broader contagion / negative sentiment?

There always is in financial markets. However, significant regulatory buffers have been in-built since the GFC (e.g., Australian Big 4 banks have 2-2.5 times more regulatory capital than they carried into the GFC) and central banks stand ready to provide liquidity where necessary. Markets didn’t like the uncertainty at the back end of last week and over the weekend, but the position taken by US authorities this morning currently has the US equity futures market trading up whilst the stock market is closed. A positive sign. 

What should I note for my portfolio?

Given the level of diversification we recommend in portfolios and our skew / bias to higher quality companies and assets, portfolios remain well insulated to these types of risks. We obviously can’t control market sentiment, which is generally driven by short-term noise, but we can ensure we keep a close eye on what’s held in portfolios (transparency), hold investment managers to account, all whilst maintaining appropriate levels of diversification and a skew to high quality companies through the cycle.

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