Silicon Valley Bank Collapse
The situation with the Silicon Valley Bank (SVB) has unravelled at an incredibly fast pace.
Following a sharp fall in deposits, the bank was forced to sell assets to cover the shortfall. These were, mainly, high-quality US mortgage-backed securities. However, these assets have fallen in value as interest rates have risen. The bank had little option other than to crystallise its losses as it needed to repair through a sale of shares.
The bank’s depositors are mostly technology related companies who proved fickle on this hint of weakness and, with encouragement from the venture capitalist community, started moving their deposits en masse elsewhere.
What ensued was a classic bank run and the demise of SVB in a matter of days.
Our portfolio exposure to SVB is only through some of our managed portfolios and this is limited to weightings in the passive US and global equity funds of less than 0.04% and so immaterial at the portfolio level.
In order to limit contagion affects, authorities on both sides of the pond have moved fast. In the US, the Treasury, Federal Reserve (Fed) and FDIC (Federal Deposit Insurance Corporation) have underwritten all depositors for SVB as well as the New York Signature Bank, a bank with strong ties to the crypto-community that has also closed. It is assumed, but not yet fully clarified, uninsured depositors will be paid out from the $128bn Deposit Insurance Fund for anything either bank’s assets cannot cover. The Fed has also announced they will provide liquidity for all banks seeing withdrawals.
In the UK, HSBC has bought SVB’s regional arm, a solution that avoids any need for government involvement or intervention.
Whether this will be enough to calm markets is yet to be seen and they remain, especially banking shares, under pressure. Clients should take some comfort from the fact that the fall-out seems fairly contained. Most other banks do not appear to carry the same level of asset-liability mismatch and the authorities have acted swiftly.
Bad risk management has undoubtedly played its part in this instance. Nevertheless, events such as this are also examples of the unforeseen consequences that rapidly tightening monetary conditions can cause. Therefore, this may give central banks something more to consider, especially with the pace of the current interest rate hiking cycle.
Should you have any further questions, please do not hesitate to speak to your adviser.