The economic world, shaken by the collapse of Silicon Valley Bank, is reminded once again by a familiar tale in 2008 when the sub-prime crisis brought down Wall Street. Silicon Valley Bank (SVB), the 16th largest lender in US with $200bn AUM, went bust on March 8th when it was seeking to raise $2.5bn to plug a hole in its balance-sheet before the Federal Deposit Insurance Corporation declared it failure.
Where did it go wrong? Its downfall was mainly a result of a highly concentrated and undiversified customer base of venture capital-backed companies that were withdrawing their deposits, forcing SVB to liquidate safe assets to finance those withdrawals. Given the venture capital boom coincided with a period of ultra-low interest rates, SVH invested the deposits at a time when bond rates were low and prices were high. By 2021, the bank had made $128bn of investments, mostly into mortgage bonds and Treasury Bills. Now with rising cash rates, yields have surged along with a decline in bond prices, leading SVB exposed as they were forced to sell off its entire liquid bond portfolio at lower prices than it paid.
Whilst its financial impacts are likely to be felt in the technology market and the US financial sector, Australian banks are unlikely to suffer a similar fate. Our regulatory system looks at whether banks can face a short-term run on deposits that forces it to liquidate assets at a loss. Banks are required to hold a large pool of high-quality liquid assets to cover a run on the bank scenario and Australia’s banks have learnt their lessons, putting considerable effort into diversifying their funding sources rather than the bond portfolio of SVB.
The SVB failure is a wake-up call that trust is fickle, and it’s not inconceivable that the faith of our major banks’ foreign wholesale financiers will be tested.
