You may have seen the recent news headlines regarding SVB Financial Group (Silicon Valley Bank, SVB), so I thought it would be worthwhile explaining the situation and how this may be impacting your investments. Firstly, Silicon Valley Bank was a US bank that focused on providing banking services to individuals and entities in Silicon Valley, California. The bank was a source of funding for start-ups and a provider of payroll processing and personal wealth management services. SVB was the banking partner for nearly half of U.S. venture-backed technology and healthcare companies that listed on stock markets in 2022.
Over the last 10 years, low interest rates and easy credit fuelled explosive growth in Silicon Valley Bank’s business, lending to technology companies and accumulating deposits. Silicon Valley Bank was sitting on a mountain of cash that needed a home, and with interest rate close to zero throughout much of 2021, their management and board decided to invest this surplus to needs cash into longer dated treasuries (government bonds). Higher interest rates caused the market for initial public offerings (IPOs) to close for many technology start-ups and made private fundraising more costly, and some Silicon Valley Bank clients started pulling money out to meet their liquidity needs. This is the beginning of the “run on the bank” saga. To fund the redemptions, on Wednesday last week, Silicon Valley Bank sold a US$21bn bond portfolio consisting mostly of US Treasuries at a $1.8bn loss.
US bank regulators require banks to hold different levels of capital for different classes of assets. More risky assets (loans) require higher capital ratios than less risky assets (treasuries). Silicon Valley Bank’s capital ratios reflected the bank’s significant holdings in “safe” government Securities (treasuries). These securities were recorded on the bank’s balance sheet as Held-to-Maturity assets, so the bank was not required to revalue the assets regularly, which is where the business unravels. Similarly to NZ, interest rates in the US have been on the rise, with eight increases to the Federal Funds Rate since March last 2022. The market value of long dated treasuries is inversely related to interest rates (just like bonds), the longer the time to maturity, the more sensitive the market value is to a change in interest rates. So, while interest rates were increasing, the value of treasuries on SVB’s balance sheet remained artificially high.
Following the sale of US$21Bn of treasuries, on Friday SVB announced to the market it would raise capital to fill this hole by issuing common equity and preferred convertible stock. Investors were looking for an exit, the capital raising failed and the Federal Deposit Insurance Corporation (FDIC) placed SVB under its receivership, after depositors pulled out as much as $42Bn USD on a single day.
Fortunately for depositors, the United States government has announced it will guarantee all deposits at Silicon Valley Bank (SVB). This is important because it enables US depositors with more than $250,000 USD of deposits with SVB to recover their cash. Individuals in the USA have insurance for up to $250,000, per depositor, per insured bank, provided by the Federal Deposit Insurance Corporation (FDIC). As an aside, bank deposits in NZ have no guarantee or insurance. The reason for the US government bailing out depositors relates to promoting public confidence in the US banking system and avoiding contagion (bank runs at other US banks). Its unlikely other creditors will collect any value from the receivership.
The S&P 500, which measures the change in price for the largest 500 US listed companies, dropped 1.45% on Saturday (Friday in the US) to reflect a decline in public sentiment and increased uncertainty. However, announcements from the US government today should help calm investors and moderate any further declines. The NZ market has also reacted to news from the US, down -0.7% for the day.
In summary, the main impact from SVB’s failure has been a hit to investor sentiment, which will recover in time.
