We had an ad hoc Investment Committee Meeting today to discuss the collapse of SVB last week. Here are our notes….
SVB was an interesting bank given that all its depositors looked similar as they were invariably involved in tech.
This is different to a high street bank. High street banks look to take deposits from a wide range of people and companies. Their aim is to mitigate the risk that all of their depositors will ask for their money back at the same time.
SVB used a proportion of its deposits to buy Government bonds and government-backed mortgage-backed securities all within regulatory requirements. All banks everywhere hold government bonds as part of their capital adequacy requirements. The regulators demand that they do.
Banks hold different buckets of bonds. Ones which they hold to maturity and those they don’t. Those held to maturity do not need to have risks hedged in the same way as those that are not do. For those that are not held to maturity banks invariably hedge the interest rate risk. The very biggest banks are meticulous about this. Some of those lower down the food chain are less so.
Interest rates went up in 2022, which forced the value of government bonds down. If you hedged that risk you limited your losses. It appears that SVB did not hedge their risks as much or as well as they could have.
Some short sellers realised this and started selling SVB shares forcing their value down. SVB’s depositors noticed and were spooked to the extent that, in a matter of hours, they withdrew something like $42bn.
The result of which was to create a risk that the remaining deposits were not covered by the government bonds SVB owned. And so the bank has failed. The positive overnight news is that the FDIC has announced that the remaining depositors will be covered 100% by them. Which is soothing.
SVB UK, although a separate legal entity, is not allowed to fly solo by the regulators and needed “rescuing”. HSBC has probably picked up a very nice little business as a result.
The immediate crisis has been averted but…..
All banks everywhere have suffered in this way to some extent to interest rates rising. Banks in the US and UK have about half the exposure European banks have. European banks and lesser SVB-like banks is where attention may now be focussed and more market pressure applied.
On the one hand such uncertainty and discomfort is disquieting and might lead to share prices falling significantly. On the other, if that does happen, it presents us with the sort of opportunity we like – the ability to buy top quality companies at a temporary discount.
Historically such moments have produced returns over and above what we would normally expect for the long-term.
We therefore look forward to such an opportunity coming our way knowing that the short-term turmoil will be to our long-term advantage, safe in the knowledge that your short-term needs are covered by cash and known income.