SVB collapse: What it means for the banking sector

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FIFI PETERS: We have been talking a lot about Silicon Valley Bank, SVB, in the past couple of days. That is following the wreckage that the news coming out of that bank caused towards global markets – global markets all over the world.

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The bank was reportedly important for funding the tech scene in the US and other parts of the world, and its collapse does mark the first major collapse of a US bank since the 2008 global financial crisis.

So let’s break down the ABC of SVB and why it is so important right now across markets. Joining us for that conversation we have David Gibb, a fund manager at Anchor Capital.

David, thanks so much for your time. I think until a week ago most of us, certainly most of us who are not in the tech space, didn’t know anything about SVB or Silicon Valley Bank. Right now it’s all that most people who are interested in markets are talking about. But just tell us a bit more about the bank and exactly what it does.

DAVID GIBB: SVB – I suppose you would call it a regional bank because it provides funding and it takes a lot of deposits for companies in the Silicon Valley area.

Typically we don’t know about all these regional banks. There are hundreds of banks in America. We only know of very large banks. But this is a bank that’s grown its deposit base very strongly over the past few years, and it’s perfectly understandable because we’ve had listings of lots of new tech companies.

Silicon Valley Bank has been in a way the ‘friendly local banker’ to that whole industry, which is often turned away by the big banks on the East Coast, like JP Morgan or Bank of America. So it’s an integral part of the community in a way, and it’s been supported by the venture capitalists.

I guess the problem is that the deposit base has grown so strongly, to the point where it was the 20th largest bank in America, where its deposit base was just under $200 billion of assets; it had roughly $200 billion of assets.

In a way it couldn’t deploy all those deposits in terms of making loans to different companies, so it wanted to increase the yield on the excess deposits. It did this at an unfortunate time, before interest rates really started moving up.

And so what happened? It invested in some long-duration assets, and last year was a terrible year for asset markets. Bond prices were down, equities were down, the worst since 2008.

So I think if you weren’t a very cautious banker last year, you are now seeing the consequences of that. [Banks] have taken an estimated loss of something like $15 billion on their securities portfolio and all these long bonds that they’ve invested in, and they frankly don’t have the capital to cover those losses. So they were thinking of having a capital raise last week.

Banking, as you know, is all about confidence, and if people lose confidence in the bank, you have a bank run. We’ve had them in South Africa over the years.

They don’t happen often. But the thing here is we actually had a series of bank runs. So there’ve been some other banks too, like Silvergate and Signature Bank. Both of those were sort of involved in the cryptocurrency space, where those asset prices were also hit very hard last year.

So Silicon Valley Bank in a way has not managed its balance sheet very well, and people have lost confidence. In fact on Thursday $42 billion was withdrawn from the bank.

FIFI PETERS: That’s a lot of money and the damage extends even far beyond that. There was a report that over $460 billion had been lost across global markets as a result of the knock to confidence that this bank going bust has caused.

You answered my next question in part, because I wanted to know if this was a result of interest rates going up too quickly over in the US, or was it a result of bad management? You alluded to some bad management. But on the flip side of that, had interest rates not gone up as fast do you reckon we’d still be talking about the bust of SVB right now?

DAVID GIBB: Probably not, because they wouldn’t be taking these losses on the investment portfolio, on the securities they’ve invested in. So I don’t think it would be a problem.

Often these bank runs happen after we’ve had a long cycle, and in this case we’ve had a long period of low interest rates – and then interest rates sort of doubled last year.

If you think of the 10-year yield in the US, it went from 2% to 4%, and that’s a dramatic change for a bank to manage, a bank that’s very geared, really, compared to a normal industrial company.

So that’s why a CEO like Jamie Dimon at JP Morgan was so cautious last year about excess deposits into the long bonds, because he was worried that interest rates might go up faster than the market was expecting. And last year was a time to be very cautious as a CEO, particularly of a bank.

In some ways it’s unfortunate that Silicon Valley Bank is in a part of the world where people get swept up by new ideas. And maybe it was tough. They got sucked into the euphoria that we’ve seen on the West Coast of America in the last couple of years in the tech space.

FIFI PETERS: It’s not entirely a bad thing to support new ideas, innovative ideas. This is how a lot of the technology companies that we use and we talk about today have been established, but perhaps a bit more caution could have been warranted.

I want to know what that means then for funding new ideas going forward.

We do know that banks like this and guys who are willing to take on risks like this have been so important for growing the start-up scene, not only in the US but even here in Africa. Do you see any repercussions or ramifications for that now with the fallout of Silicon Valley Bank?

DAVID GIBB: Well, in some ways Silicon Valley Bank doesn’t really directly invest in equities in a lot of these banks. They provide loans. And so it’s not like a venture capitalist. We have plenty of those operating well, and a lot operating in South Africa too.

So the venture capitalists are the ones who take on a lot more of the risk. The Silicon Valley Bank, or the banks, are the banks for these startups really. So it’s more of a traditional banking relationship.

Look, frankly the funding has dried up in that sector because share prices came off so sharply last year.

A lot of the early-stage companies were loss-making. A lot of the share prices were down 80/90% last year. And so I think there has been a reckoning in many ways in that area.

I think this will just make people even more cautious. I see this as a mini crisis. I don’t think this is going to spread beyond the smaller banks.

Obviously we had pressure on a lot of the banking shares yesterday. Today a lot of them are recovering a bit.

They’re still down on where they were a week ago. But I really put this down to some niche banks’ crypto, or [their] focus on a particular area; in this case it’s tech, a combination of interest rates going up and maybe management teams that are not cautious enough.

But in some ways you probably have a flight to safety now, and the bigger banks will take on a lot more of these deposits. So I feel there’s a mini crisis in the smaller area of the banking field in the US.

FIFI PETERS: All right. We can only hope that you’re right. But David, thanks so much for your time and for giving us a better understanding of why the story is important right now. David Gibb, fund manager at Anchor Capital, discusses the SVB collapse and what it could mean for the banking sector.