Chart of the month:
SVB – why it’s important and what you need to know.
Less than one month ago, Silicon Valley Bank (SVB), was America’s 16th largest bank. It held approximately USD$170 billion in client deposits. Last Wednesday, 8 March, SVB announced an emergency capital raising, as a result of having sold over $20 billion in assets at a loss to fund customer withdrawals. The next day, customers collectively tried to withdraw a further $42 billion, and SVB literally ran out of money. The regulator took control on Friday 10 March.
By Sunday night, just 4 days after the panic set in, US regulators had devised a plan to effectively guarantee all customer deposits. So SVB account holders will ultimately suffer no loss. Regulators also plan to make a facility available to act as a circuit breaker against the potential for other US banks to suffer the same fate, following the failure of a second, smaller, crypto-focused bank over the weekend.
Contrary to deposit holders, owners of SVB shares and bonds will not be so lucky. It is almost certain they will lose the entirety of their investment. On Monday 13 March, Australian LIC Pengana International Equities (ASX code: PIA), announced they had held 2% of their portfolio in SVB shares, which are now likely worthless.
While the circumstances surrounding the collapse are mostly specific to SVB, one weakness is common to many other banks. Almost all financial institutions, as part of their assets, hold some bonds and other fixed-interest investments where the rate of interest they receive is set for the life of the investment, which in many cases is 5 years or more. As interest rates have risen over the past 12 months, the value of those fixed rate investments has fallen. This makes sense. If you bought a 10 year bond paying 2% per annum at the start of 2022, and the going rate for new 10 year bonds in 2023 is now 4.5% per annum, then you’re going to have a take a loss if you want to sell that shabby 2% 2022 bond in today’s market. Very simply, that old 2022 10 year bond is paying 2.5% less than the current market for the remaining 9 years of it’s life. So today’s buyer is going to want to pay about 22.5% less for it now (2.5% pa x 9 years of remaining term). The chart below shows the impact of this on US banks. It shows the difference between US bank fixed interest investments’ original cost and their current market value.