As reported recently, the collapse of Silicon Valley Bank (SVB) is the largest bank collapse in the US since 2008 in the lead up to the GFC. We have had many calls from our clients who are concerned this may lead to a broader contagion in the financial industry.
Following are some observations by Erik Ristuben from Russell Investments regarding the SVB situation:
- SVB had a concentrated depository base and an asset portfolio with a higher percentage in bonds than loans, making it different than the average bank.
SVB’s customer base largely consisted of private equity and start-up firms, therefore in many ways it was not a typical bank in terms of customers. A “typical” bank takes deposits and then loans that money to individuals and businesses.
In the case of SVB, there were some important differences between it and the average bank:
- A concentrated depository base both in terms of privately held companies and the average size of deposits. Average deposit size of approximately 37,000 clients which made up around 74% of the bank’s assets was more than $4 million
- An asset portfolio with a higher percentage in bonds than loans
Also, SVB had a large bond portfolio invested when interest rates were low. When interest rates begin to rise, as they have done over the past year, then a bond portfolio’s valuation goes down. A large part of SVB’s bond portfolio was designated as “held to maturity bonds”, which tend to include bonds that have longer than average durations.
SVB were selling these bonds and realising the losses, which affected its regulatory required capital ratios. This erosion of capital was significant enough to have to raise capital through the sale of equities. Once this became known, depositors saw their assets in jeopardy and a run on the bank commenced. At that point, the regulators came in and shut down the bank and took control. This is normally how a bank fails – due to loss of liquidity.
Because of these differences, most industry experts do not view the specific risk that led to the collapse of SVB as representing a large systematic threat to the bank system as a whole.