Asset allocator alarm on tech sector after SVB collapse
While institutional investors are busily assessing the likely impact of the Silicon Valley Bank (SVB) collapse on their portfolios, some say the ramifications are likely to go far beyond immediate concerns over direct exposure.
A more serious liquidity crisis has technology-focused investors in particular facing an uncertain future.
Timothy Tsui, a Hong Kong-based entrepreneur and technology sector investor said: “This is not good for the tech sector. Smaller sized banks in the US are going to become very tight on credit. This is not good for the availability of liquidity and growing businesses. Even if you have a stable cashflow business, it’s going to be harder to get a loan,” he told AsianInvestor.
The causes of this latest banking collapse have echoes from the 2008 financial crisis, in that SVB was brought low by investing in an asset class considered to be low risk. Searching for yield while rates were low, SVB invested $90 billion of a $120 billion portfolio in long-term US Treasury bonds and mortgage-backed securities.
INTEREST RATE RISK
While Treasuries and MBS are safe investments from a credit risk perspective, they pose substantial interest rate risk. Rising rates saw the bank sitting on potential losses of $16 billion.
An attempted fund raising to strengthen its balance sheet failed and, sensing trouble, the bank’s core clients on March 9 withdrew $42 billion, a quarter of the bank’s total deposits. The US Federal Deposit Insurance Corporation (FDIC) moved to shut it down, but not before the bank had been cleaned out.
“The SVB situation is a case of gross mismanagement," John Pearce, CIO of Unisuper told AsianInvestor. “There are simple, cost-efficient ways to manage duration risks and mismatches.”
Pearce did not believe, however, there was a systemic risk that needed to be addressed.
“We do not see any contagion risk to systemically important banks,” he said, adding that the potential crisis appeared to have been well contained, “and will not be a catalyst for any change in UniSuper’s strategy.”
Jason Hsu, CIO of Asian specialist fund manager Rayliant, said, "For Asian investors, while there is risk that many banks may have large unrealised losses from the rise in long bond yield, there is no risk of a liquidity driven banking crisis of the 2008 flavour."
Singapore-based family office investor Cheong Wing Kiat told AsianInvestor that in his view: “SVB is an isolated case of poor asset-liability balance sheet risk management. It should not pose a systemic risk and should not affect investor confidence in the Asia-Pacific in the long term.”
LIQUIDITY SQUEEZE
The drama isn’t over though.
SVB provided banking services to half of all venture-backed technology start-ups. Its failure is the second largest banking crash in US history. Signature Bank and Silvergate Capital, the two main banks serving the crypto industry, have also been forced to close in the past week.
Cheong said these bank collapses will be harmful for the tech sector.
“Without doubt, the collapse would be a crisis for venture capital-backed companies and startups in the US and countries where SVB had joint venture operations,” he said.
“They were also major lenders to New York real estate investors,” said Tsui. "So this has implications for the wider US economy. Also, don’t forget what happened to First Republic Bank.”
San Francisco bank First Republic’s shares dropped over 60% on Monday after declining 33% last week.
Tsui is concerned this is not being factored in yet.
“Everyone’s worried about the SVB depositors, who will be less worried now the US government has allowed them to access funds. But I’m quite worried that all these three banks have a loan book. What’s going to happen to that, and whoever borrowed money from them will face demands from creditors for repayment.
"The government is not guaranteeing the loans. So let’s say SVB made $20 billion in loans. Someone’s going to go chasing after that money. What’s going to happen to those businesses that borrowed the money?
“I don’t think people are talking enough about this.”
BAIL-OUT BLUES
The decision to bail out SVB (although officials are not yet using the B-word) and secure depositors has been criticised by some, including hedge fund legend Ken Griffin. He believes the economy could have absorbed the shock of the SVB collapse and learnt from the experience.
But renowned economist Joseph Stiglitz responded: “That is nonsense. Banks’ bondholders and shareholders are still at risk if they don’t oversee managers properly. Ordinary depositors are not supposed to be managing bank risk.”
The US government has acted to assure SVB depositors that they will be covered under the FDIC deposit protection scheme. But unlike in 2008, shareholders and bondholders in the banks will not be compensated.
“They knowingly took a risk and when the risk didn’t pay off, investors lost their money. That’s how capitalism works,” President Biden said on Monday.
Tsui believes investors will be far more cautious now, looking closely for signs of weakness in the financial sector. Attitudes within the digital economy may also be hardening. There was certainly no loyalty shown to SVB by its crypto-heavy borrowers, as word spread of the bank’s vulnerability.
“My money is my money is my money,” said Tsui.