15 Mar 2023
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Silicon Valley Bank Update
By Chris Lioutas, PSK Chief Investment Officer
There has been a lot of press around the US bank – Silicon Valley Bank which collapsed over the weekend. Here’s what happened and the impacts on our portfolios.
What happened?
The company got itself stuck in a tough place where a series of events meant it wasn’t afforded enough time to work its way out of some issues on their balance sheet. A sale of securities from their investment book crystallised portfolio paper losses they had been carrying. The company then sought to fill the losses through an equity raise which spooked already jittery prominent Silicon Valley insiders who then proceeded to spook deposit holders. The equity raise failed, the share price of the company plunged, and deposit holders began frantically trying to withdraw their personal or business cash accounts (mostly the latter). The regulators then shut down the company, handing it to the US Treasury, the US Federal Reserve, and the Federal Deposit Insurance Corporation to work through an orderly bail-out.
Concerns then arose regarding other smaller US banks as deposit holders’ fears rose.
What have authorities done to stem the risk?
Important to note that US authorities have moved to mitigate fears and provide support to the banking system with measures including:
- Insuring all SVB deposits (and that of another bank – Signature Bank) – with the immediate payment of insured deposits (ie. up to US$250k), and payment within a week to all uninsured depositors (ie. amounts over US$250k).
- The US central bank has opened a short-term funding facility for unlimited amounts for 1 year to provide liquidity to banks who might be exposed to large withdrawals of deposits.
- SVB auctioned off to the bigger banks, with the UK division being sold for US$1 and a buyer yet to be found for the main US business.
- SVB shareholders and unsecured creditors will not be protected – ie. taxpayers will not foot the bill this time.
What got SVB into trouble?
The benefit of hindsight is a wonderful thing in investment markets, whilst some things are simply out of the company’s control, the more obvious issues included:
- Concentration in one industry – ie. technology. The bank mainly serviced technology companies and technology entrepreneurs. The technology industry is under stress given widespread layoffs, large share price falls, and falls related to crypto assets/currencies.
- The bank didn’t hedge the interest rate risk on their investment book, possibly because less than 50% of its deposits (very low by industry standards) were lent out. The rest were invested, and ultimately poorly managed as we now know.
- The US central bank’s rapid hiking of rates caused paper losses in their investment book, which the bank then crystallised.
- Whispers of investment losses and a capital raise spooked deposit holders, largely fed by prominent venture capital / technology sector insiders.
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.
Is there risk of broader contagion / negative sentiment?
There’s unlikely to be broader contagion risk given the issues described above were quite specific to SVB and given the actions since taken by regulators to protect deposit holders and the promise to provide access to funding (a back-stop) for 12 months for any bank that might need it. Also worth noting, significant regulatory buffers have been in-built into the banking system 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 early this week provided some comfort to markets.
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.
We remain watchful of prevailing news and conditions, but at this stage we see no immediate reason to take action within portfolios.
As always, if you have any questions or your personal circumstances have changed please do not hesitate to contact your financial adviser
General Advice Warning - Any advice included in this article has been prepared without taking into account your objectives, financial situation or needs. Before acting on the advice, you should consider whether it’s appropriate to you, in light of your objectives, financial situation or needs.
