Those following the news will have noticed that recently in the US two banks have gone into a government controlled wind down, Silicon Valley Bank and a rival, Signature Bank. In particular, Silicon Valley Bank was one of the 20 largest US banks.
The Silicon Valley Bank was affected in part by holding bonds that had lost value as the US Federal Reserve increased interest rates.When interest rates go up unexpectedly, the value of bonds falls. The longer the term of the bond, the larger the fall in price. Silicon Valley Bank held very long-term bonds at low interest rates. On Wednesday 8 March, the bank sold its bonds at a significant loss and announced a plan to raise additional capital. However, deposit holders, which included many venture capital firms, became alarmed and sought to simultaneously withdraw their funds, which led to the bank collapsing.
In order to restore confidence in America’s banking system, US Treasury Secretary Janet Yellen, Chairman of the Federal Reserve Jerome Powell and Federal Deposit Insurance Corporation (FDIC) Chairman Martin J. Gruenberg released a joint statement on Sunday US time. They announced the FDIC would make Silicon Valley Bank and Signature Bank’s customers whole by guaranteeing all deposits including all uninsured deposits.
Customers of the failed banks would have access to their money starting Monday US Time.
The rationale behind this strong response was to prevent any further bank runs and to help companies that deposited large sums with the banks to continue to meet liquidity needs.
Whilst we cannot know if other banks in the US are also at risk, the US Government has sent a signal that withdrawing deposits in response to fear is unnecessary.
For our clients, the direct exposure to the Silicon Valley Bank in our share portfolios is minimal, between 0.03% and 0.04% depending on the underlying fund. That translates into about 3 - 4cents for every $100 invested. These small exposures show the benefit of widediversification across many businesses and industries.
As you are reading this, markets have already priced in this news and the actions of the US government have gone a long way towards calming markets. As always, we encourage investors to look past periods of short term volatility, which in the long run are unlikely to impact your plan.
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The information contained in this article is general in nature. It may not be relevant to individual circumstances. Before making any investment, insurance or other financial decisions, you should consult a professional financial adviser.
This article is for the use of persons in New Zealand only.
