Market Update – March 2023

Silicon Valley Bank (SVB)

Below is an update on developing news regarding the U.S. banking sector.

The recent failure of Silicon Valley Bank (SVB) warranted the attention of investors, given the size and speed at which its deposits were withdrawn ($40B within 36 hours – 25% of their deposit base), highlighting vulnerabilities to the banking sector, notably with smaller regional banks. 

SVB’s failure was not related to credit quality but rather a deposit quality issue. The bank could not convert loans and securities to cash quickly enough to meet the demands of depositors.

Policymakers have acted swiftly to prevent systematic risks. This morning (AEST), U.S. policymakers announced an extraordinary package to protect all SVB depositors, and provide additional support to U.S. banks to prevent future deposit liquidity issues. 

Background

Silicon Valley Bank (SVB), a U.S. regional bank listed on Nasdaq, has been placed into receivership due to a run on its deposits – i.e. customer cash withdrawals exceeding available short-term capital.

Many clients would not have heard of SVB before. Essentially, it was a bank for start-up companies and venture capital funds in Silicon Valley.

In short, SVB was a poorly run regional bank with unusually high exposure to risky businesses that grouped together to withdraw deposits of $40B over 36hrs in the face of growing anxiety over the sustainability of SVB’s business model.

SVB will go down in history as another victim of this interest rate hiking cycle, behind all cryptocurrencies and the crypto exchange FTX.  

What this means for clients

Our client portfolios have no direct exposure to Silicon Valley Bank (SVB). Overall, we continue to have a defensive tilt across portfolios, waiting for growth opportunities that will likely come from something ‘breaking’ in the face of higher interest rates to combat inflation.  

Central banks usually raise rates until something breaks, and we are starting to see the cracks form. In the meantime, the investment environment is expected to remain volatile, where equities and bonds will likely bounce around the prevailing inflation data.

Later this week, we’ll be sharing some insights on the recent ASX reporting period.

^{General Advice Warning: Any comments made in this communication do not consider your objectives, financial situation or needs. Before acting on any general advice, consider whether it is appropriate for you.}