A Californian bank has gone bust, raising fears of contagion. What will it mean for mortgage holders here?
The collapse of Silicon Valley Bank, the second biggest in US history, has triggered fresh fears the entire financial sector may be under threat as depositors withdraw their money from other banks.
The bank folded on March 12, just 48 hours after the first signs of trouble emerged, leaving some of Silicon Valley’s biggest tech names scrambling for $US175 billion ($262 billion) worth of deposits.
It wasn’t just the size of the collapse but the lightning speed with which it happened that caught everyone by surprise. And in the age of social media, fears quickly spread to other banks, with New York-based Signature Bank closed by US authorities just days later. Another Silicon Valley-related bank, First Republic Bank, was later forced to reassure investors on its liquidity after shares plunged more than 60 per cent in a single day.
So, what happened at SVB? And what’s the relevance to Australia?
Credit:Artwork by Jamie Brown based on an image from Bloomberg
What is Silicon Valley Bank?
Based in California, SVB was founded in 1983 and made its name as the go-to bank for Silicon Valley’s tech companies, including thousands of start-ups, many of which used it to safeguard cash in the hundreds of million of dollars that had been raised from investors and venture capitalists. At the time of SVB’s collapse, this deposit base was estimated to be worth $US175 billion.
E-commerce group Etsy used SVB to pay the 7.5 million artisanal sellers who use its platform. Streaming service Roku had $US487 million deposited with SVB when it collapsed. Gaming platform Roblox, creators of Minecraft, had part of its $US3 billion of cash reserves with the bank. Australian tech companies such as hotel booking service Siteminder also had substantial cash reserves with SVB.
SVB was unusual by financial industry standards in that most if its customers were from just one sector, tech. A lot of the money in SVB was not used to make loans either, it was invested in US government bonds.
These tech companies got crunched by high interest rates which slashed their valuations, severely hampering their ability to raise more cash. These higher interest rates also shredded the value of the government bonds SVB acquired with this cash.
It would have been fine if SVB could have held these debt securities to maturity and then been paid in full, but its increasingly cash-starved tech customer base needed their money. This forced the bank to sell these debt securities at a loss.
The first signs of trouble appeared when the bank publicly announced it had been forced to sell these debt securities (bonds) at a loss. It also announced plans to raise capital by selling $US2.25 billion in new shares to shore up its balance sheet. This became impossible after an alarmed market triggered a share price collapse.
Rattled customers then withdrew larger volumes of cash. And they had reason to worry: US federal law insures deposits only up to $US250,000 and tech companies with multi-million-dollar deposits with the bank risked losing most of their money. There was a run on the bank and SVB was unable to meet the withdrawal demands of its depositors by selling more bonds at a loss.
SVB is the second-biggest failure and Signature Bank is the third. The biggest bank failure in US history was Washington Mutual in 2008, amid the global financial crisis.
So, have the customers lost their money?
No. Within days of its imminent collapse, the bank was being rescued by US Treasury officials with the backing of the Federal Reserve and other authorities, which ensured depositors would get all of their money back.
US Treasury officials were at pains to say the multi-billion-dollar rescue was not a bailout by US taxpayers. Treasury Secretary Janet Yellen was able to assure her fellow Americans that it was the banks – which pay into a $US100-billion rescue fund – that would pay. “No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer,” she said in the statement announcing the rescue.
The US Federal Reserve Board also announced a new funding facility for deposit-taking institutions to stop an SBV-type situation recurring: it will ensure banks are not forced to sell debt securities at a loss in order to fund customer withdrawals.
President Joe Biden reassured Americans the banking system was safe. “Your deposits will be there when you need them,” he said.
The US regulators are not rescuing everyone, though. Bondholders who loaned money to SVB, and the bank’s shareholders, face the loss of their entire investments.
What does it mean for Australia?
Similar to the US, Australia has a government guarantee of deposits worth up to $250,000 per person, per bank, credit union or building society. Unlike the US, Australia doesn’t have a pre-funded scheme in place; the money would come from the government, and the government would then have to make a claim on the assets of the failed bank, or put a levy on the banking industry.
However, it’s also widely assumed that government would come up with a rescue plan for larger deposits if a major bank faltered, which is considered highly unlikely.
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However, industry experts are confident a collapse such as SVB could not happen here. “We do not believe the conditions that allowed a run to happen on SVB exist for Australian banks,” says Morningstar analyst Nathan Zaia. He points to the high concentration of SVB customers in one sector, creating a liquidity risk, and the large percentage of assets held in investment securities that were trading at a loss. This is by contrast with Australian banks, he says, which primarily invest in mortgages and corporate debt.
The most significant impact in Australia of the SVB crisis has been financial markets betting it will result in a lower peak in both US and Australian interest rates than previously expected. “The US Fed may need to pass on raising rates again at the next meeting,” says Betashares chief economist David Bassanese. “Depending on the fallout in the next few days, moreover, the mayhem will likely be enough to encourage the RBA to pause at the April meeting.”
And ANZ Bank economists have said futures market pricing suggests there could be a pause in RBA’s rate rises in April or May. But ANZ Bank senior economist Felicity Emmett has said ANZ still believes there will be another two rate rises from the RBA. “Our view at this stage is that the contagion will be quite limited and that it’s unlikely to impact the Fed or the RBA,” Emmett has said.
She is not the only one signalling that SVB may not provide any panacea for struggling Australian mortgage holders. Zaia says the opposite could be true. “Probably the largest risk is that the SVB failure leads to higher costs of debt-funding for banks globally,” he says.
This includes Australian banks, which rely on global funds for part of their mortgage funding. This could put them in a situation where they’re forced to raise mortgage rates even without an RBA rate rise. “In Australia, this would likely be passed on to borrowers on variable rates over time,” Zaia says.
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