Silicon Valley Bank – minimal portfolio exposure
Two US banks, Silicon Valley Bank and Signature Bank, have gone into a government-controlled wind down. Silicon Valley Bank was among the largest 20 US banks and was affected by the loss of value of their bonds as the US Federal Reserve increased interest rates. This led to the bank selling their bonds at a significant loss and announcing a plan to raise additional capital. Deposit holders, including venture capital firms, then became alarmed and withdrew their funds, leading to the bank’s collapse.
To restore confidence in the banking system, the US Treasury Secretary, Federal Reserve Chairman, and FDIC Chairman released a joint statement announcing that the FDIC will guarantee all deposits, including uninsured deposits, to make Silicon Valley Bank and Signature Bank’s customers whole. Customers will have access to their funds from Monday 13/3/23.
Although it is unknown whether other US banks are at risk, the US government has shown that withdrawing deposits out of fear is unnecessary. For our clients, the direct exposure to Silicon Valley Bank in their share portfolios is minimal, ranging from 0.03% to 0.04%, depending on the underlying fund. This translates to approximately 3-4 cents for every $100 invested and demonstrates the advantages of diversification across multiple industries.
Markets have already priced in this news and the actions of the US government have gone a long way towards calming markets. As always, we encourage investors to look past periods of short term volatility, which in the long run are unlikely to impact your plan. The S&P500 Index on Monday was down slightly by 0.15% with the technology heavy NASDAQ index up 0.45%.
Update 17 March – Credit Suisse Bank troubles
The news of Credit Suisse Bank’s financial troubles caused a brief shock in European markets earlier this week. The Saudi National Bank, Credit Suisse’s largest shareholder, made comments that it will not make any more investment in the bank due to regulatory restrictions, and the disclosure of material weaknesses in Credit Suisse’s 2021 and 2022 financial reports.
The situation was resolved when the Swiss Central Bank stepped in and announced a line of credit worth US$54 billion to provide financial support. In addition the Swiss Financial Market Supervisory authority stated that Credit Suisse had met the “capital and liquidity requirements imposed on systematically important banks.”
The present situation is distinct from the failures of Silicon Valley Bank and Signature Bank in the United States. Credit Suisse has faced previous problems, such as a criminal conviction for enabling drug dealers to launder money in Bulgaria, involvement in a corruption case in Mozambique, a spying scandal that implicated a former employee and executive, and a significant client data leak to the media. Furthermore, there were losses of US$5.5 billion from Archegos and approximately $1.7 billion from Greensill. As a result of all of these incidents, there has been a lack of trust and confidence among the bank’s clients.
The outcome of these incidents is an $8 billion shortage in capital funding and bank client confidence. It is clear that the bank needs to focus on improving its culture and policies related to risk management and their execution.
Is this another Lehman Brothers moment?
The failure and lack of Government support of the Lehman Brothers triggered the Global Financial crisis in 2008. The short answer is no, this is not another Lehman Brothers moment.
The circumstances around the recent bank failures/troubles are very different to what triggered the 2008 financial crisis with the use of highly leveraged ‘Collateralised Financial Debt Obligation (CDO)’ instruments.