15 March 2023

Market Update- Silicon Valley Bank (SVB)

As you may have seen in news reports over the past few days, a regional US bank known as Silicon Valley Bank (SVB), collapsed late last week, precipitated by a bank run on deposits. While this is concerning, and for some may be a reminder of 2008, we feel there are some key differences to that period.

Firstly, SVB was not an ordinary bank. It was a bank that specifically targeted Venture Capital Funds and related companies as clients. These clients were big beneficiaries of the low-rate environment over the past few years. However, as rates have increased sharply in recent times SVB clients had to draw down on their deposits. At the same time poor balance sheet management by SVB meant it was ill equipped to meet these demands. In short, the bank operated at a particularly risky and interest rate sensitive end of the market. It was not an ordinary bank.

Secondly, having learnt lessons from the GFC, US government agencies have been extremely swift to act, shoring up deposits over the weekend, providing a safety net. This support is something they were much slower to provide during the GFC, and only after the failure of much more mainstream institutions.

Given these solvency issues are currently limited to SVB and a couple of other niche players, there does not appear to be a case to react to the event via any material change to portfolio settings at this stage. Especially as The Wealth Designer portfolios are already well diversified. Further, unlike the GFC, corporate and loan defaults are generally still quite benign, with the broader banking sector very well capitalised. While the event does heighten market nervousness and potentially magnifies market reaction to negative news, we will continue to monitor things closely and react accordingly. We also note this series of events could potentially create positive investment opportunities in the period ahead.

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