Regulators announced the closure of Silicon Valley Bank on March 10, an institution that specialized in providing banking and financial services to the technology and life sciences industries as well as private equity and venture capital firms. “Nearly half” of U.S. venture‑backed technology and life science companies bank with Silicon Valley Bank, according to the company. With more than USD 200 billion in assets, Silicon Valley Bank is the second‑largest bank failure in U.S. history, eclipsed only by the collapse of Washington Mutual in 2008.
Like SVB Financial Group, Signature Bank’s deposit mix included a concentrated customer base and a higher proportion of uninsured deposits. The reputational damage that the company appeared to suffer from providing banking and financial services to the cryptocurrency industry also may have shaken customers’ confidence in the bank, making it prone to withdrawals.
On March 12, New York state banking regulators announced the closure of Signature Bank, which will be placed into receivership with the Federal Deposit Insurance Corp (FDIC). Signature Bank’s weakness appeared to reflect concerns about its exposure to operating deposits of companies involved in cryptocurrency and other digital assets. Signature Bank’s collapse is the third‑largest bank failure in U.S. history.
SVB Financial Group’s woes stemmed, in part, from putting roughly USD 90 billion of its deposits in long‑dated securities, including mortgage bonds and U.S. Treasuries. These securities declined in value as the Federal Reserve increased interest rates, unrealised losses that would not matter if these bonds were held to maturity. The slowdown in venture capital funding led to startups spending their savings, reducing the bank’s deposits and forcing it to sell about USD 21 billion of the longer‑dated securities in its portfolio at a loss. The bank holding company had planned to issue USD 1.25 billion in common shares and USD 500 million worth of convertible preferred stock to offset the loss and shore up its balance sheet. However, news of the deal and the bank’s challenges spooked customers and led to a run on deposits. On March 10, SVB Financial Group withdrew its share offering. The FDIC announced the bank’s closure and placed it under receivership to protect insured depositors.
As of yesterday, Credit Suisse Bank in Switzerland failed to raise capital from its largest investor, The Saudi National Bank, causing reverberations in European equity markets causing a downturn of between 3.5% to 4% across the board. The Swiss Central Bank has stated that they will secure the deposits of Credit Suisse to appease the market given it is a systemically important bank. However, based on the filing to the market, Credit Suisse has met all the stringent capital and liquidity regulatory requirements imposed on systemically important banks which is somewhat comforting.
Some stats on US bank failures, since 2009 there has been 513 banks fail, the bulk of which occurred between 2009 and 2014 during the financial crisis. Since 2014, there has been over 30 banks fail, including the two over the weekend. The most recent failures come 867 days since the previous failure in October 2020. There were four failures in 2020 and 2019.
Are we out of the woods yet? I think market volatility will remain elevated over the next few months as this banking crisis plays out. There will be continued pressure on regional banks in the US in particular. However, consensus view amongst economists and investment pundits is that markets will end in positive territory towards the end of this calendar year.
In Australia, although we have complained about this for years, the banking system is far more stringent and generally tends to lend on very secure collateral (like property assets) and not generally only on cashflow. We also do not have a large client base of start-ups that have been lent to by the major banks. This does stem growth of new ventures and industries, but by the same token, means there is more stability in the banking system.
As an aside, none of our International Funds had exposure to the collapsed banks and, over the past year, have tilted the portfolio towards a more value-driven and conservative focus. Our strategy is to remain tilted towards value (still having growth exposure off course) and focus on quality exposures via our suite of fund managers. We continue to monitor the markets and meet regularly with our portfolio managers to ensure they are both meeting and adhering to their mandates.