Is Australia safe from the US bank collapse?

Sam Hawley: Hi, I’m Sam Hawley, coming to you from Gadigal Land. This is ABC News Daily. When the US banking sector collapsed 17 years ago, it sent shock waves around the world that resulted in the worst financial crisis since the Great Depression. Now the US is weathering its worst bank failure since then. So why did Silicon Valley Bank collapse and what implications could it have for us here in Australia? Today, ABC business reporter Nassim Khadem. On the fragile banking system and how quickly things can unravel.

Sam Hawley: Nassim, SVB or the Silicon Valley Bank. It’s really a bank that not many of us would have heard of until this week, of course. So what exactly is it?

Nassim Khadem: So Silicon Valley Bank is a bank that really was focused on servicing the tech sector and the Start-Up sector, because often when you just start out a company, it’s very hard to get funding and the traditional banks won’t give you the money. So this bank was a major bank that led to a lot of the start-ups that you see in Silicon Valley and beyond.

Silicon Valley Bank commercial: At Silicon Valley Bank, we deal in innovation. We work with the entrepreneurs, companies and investors that are defining what comes next. This means we have the coolest clients of any bank.

Sam Hawley: So it was a bank that stepped in when there was all these new start ups, tech start ups. So it was a bank that took a risk on them. It said, Sure, we’ll back you on this.

Nassim Khadem: Exactly, and I mean, that’s the nature of start ups, right? You need people to back you. And often, you know, people get even in the very early stages, they’ll go to their friends and family to try and get funding and then they’ll kind of scale up and they’ll go to venture capital funds and then ultimately banks. So it was a really crucial part of funding for the tech sector.

Sam Hawley: And as the tech sector got big and got big quickly, so did SVB, the Silicon Valley Bank. I can see that in 2018 it had just over $50 Billion in assets, and then by 2023 it had $200 Billion. So it’s a big deal.

Nassim Khadem: Yeah, it was a a really significant player. As a result, anybody who sort of saw themselves moving up in the in the tech sector would go to this bank to try and get funding. And it was the 16th largest bank in America before its collapse. So this makes it the biggest bank failure now since the global financial crisis of 2008, about half of all venture capital funded start ups in the US were customers of SVB and that people estimated was about 65,000 start-ups. So it is quite massive.

Silicon Valley Bank commercial: As you can see, we’re not a typical bank. Silicon Valley Bank is making next happen now.

Sam Hawley: Okay, so it had a lot of customers. When did these customers first realise that something was going a bit wrong?

Nassim Khadem: So really the the dire situation unfolded on March 8th and that was when the bank reported a US $1.8 billion loss on the sale of US Treasury securities. What happened was during the pandemic, SVB and many other banks were taking on more deposits than they could lend out to borrowers. So in 2021, deposits at SVB doubled. Whatever the bank couldn’t lend out was instead invested in what they saw at the time as very safe US Treasury securities. But this was really a risky proposition because at the time rates were really low and when interest rates went up, that meant that they had more liabilities on their books and they were trying to get rid of those liabilities and couldn’t. And, you know, that’s what spooked everyone and why people started trying to pull their money out.

Sam Hawley: Right. So what you’re saying is that all these bonds, these securities that SVB had bought during the pandemic, they became really risky as interest rates kept rising over and over again, as they were doing here in Australia as well. And all these tech companies that had deposits at the bank, they became really nervous and they were sort of rushing to withdraw their money. But SVB, the bank actually didn’t have the money to pay them, so it had to go about selling these bonds at a multi-billion dollar loss. And so the tech companies are super spooked by this stage. So what are they doing?

Nassim Khadem: You know, people started wanting to pull their money out.

Silicon Valley Bank customer: I came out to talk to the bank, just got in line with a lot of other founders and and CEO’s just to find out what was happening and also the options we’ve got.

Nassim Khadem: Founders basically showed up at the bank branch in Manhattan, and that included former Lyft executive Dan Levy. And by the time Levy and these other investors actually decided to pull their money from the bank, the site was down, their accounts were blocked, their bankers were unreachable. And Levy kind of says in a in a LinkedIn post, it took him about 16 hours for the bank to unblock his account. And he actually went down to that New York branch and tried to get a cashier’s check. And then he says they actually called the cops on him. So it was all quite colourful as it unfolded. But the bigger problem was not only were people spooked, but a lot of venture capital funds were also telling. Even people who didn’t have deposits were telling them not to kind of bank with Silicon Valley Bank. And so it just spooked the entire sort of ecosystem of start-ups and tech companies.

Sam Hawley: Interestingly, though, the US government was very quick, wasn’t it, to bail this bank out or at least bail its customers out?

Joe Biden, US President: Last week when we learned of the problems of the banks and the impact they could have on jobs of small businesses and banking systems overall. I instructed my team to act quickly to protect these interests. They’ve done that. They’ve done that.

Sam Hawley: What did it do?

Nassim Khadem: So there’s something called the Federal Deposit Insurance Corporation. And they not only took control of SVB deposits held with SVB, but also of another bank that collapsed afterwards called Signature Bank.

Joe Biden, US President: All customers who had deposits in these banks can rest assured. I won’t rest assured they’ll be protected and they’ll have access to their money. As of today.

Nassim Khadem: And this signature bank and Silicon Valley Bank will basically have been guaranteed that there will be no losses borne by the taxpayer. So the bank regulators are now guaranteeing deposits and under this scheme, they usually protect deposits of up to us 250,000. But the FDIC also confirmed they’ll be backstopping all depositors of SVB, not just those with smaller balances covered by the standard protections.

Joe Biden, US President: No losses will be borne by the taxpayers. Let me repeat that. No losses will be borne by the taxpayers.

Nassim Khadem: And this is, you know, to insure some stability and ensure that, you know, people don’t keep getting spooked and don’t keep trying to pull out their money from from banks because there can be a contagion effect. You know, if people start pulling their money out of one bank, they might think other banks are not secure and will start pulling their money out of other banks as well.

Sam Hawley: So Joe Biden’s trying to assure the American public that everything’s okay. He’s fixed it. Everybody’s going to get their money back. But it’s a lot of money. I guess one of the big questions here, Nassim, is what does this all mean for the tech sector? Because it was this sort of bank that was really, you know, giving it a kick start that was really protecting it. So what does it mean for the sector as a whole, do you think?

Nassim Khadem: Yeah. So basically, I spoke to Dan Ives. He’s the managing director of US based Wedbush Securities.

Dan Ives, managing director, Wedbush Securities: Silicon Valley Bank is the godfather of the what I view as the tech ecosystem from a banking perspective, a very important piece of the Start-Up ecosystem.

Nassim Khadem: And he says unlike with the global financial crisis, the SVB collapse doesn’t pose systemic risks because the world’s biggest banks are extremely well capitalised. What he does say is that despite these this not having a general effect, these banks were actually the foundation of the tech start up landscape. And he says that going forward, lenders will be far more stringent when it comes to funding start ups. He says that could definitely cause start ups to either fail or potentially have to merge or to just have to look for alternative financing, for example, going to private equity firms.

Dan Ives, managing director, Wedbush Securities: I mean, you don’t replace this. I mean, this is something where now other banks will come in. It’s going to be under a lab microscope in terms of every loan that they give to tech start-ups And I think it’s something that’s going to be an uphill battle and it’s really going to cause a winners and losers on the Start-Up community within tech, not just in the Valley, but around the world, you know, from Europe to Asia to Australia and everywhere.

Sam Hawley: All right. So you spoke about the contagion effect before. And I guess that’s a question a lot of people now have. Could this issue spread? Could it spread around the world?

Nassim Khadem: So, I mean, part of part of the concern is that, you know, and some people have sort of said this to me when I’m doing interviews with them is that, you know, media are spooking everyone. And the social media debate’s kind of spooking people more. So there is a risk of sort of wider contagion. But beyond that, there’s also concerns that it could actually lead to a fall in confidence. And that fall in confidence could, you know, see well, if there’s more bank failures, that would certainly dent confidence and that would then impact the economy. So I spoke to Betashares chief economist David Bassanese, and he says the collapse could actually cause a US recession. He says you may get many of these banks going under or being unable to lend. And he says these banks are sitting on a lot of unrealised losses on their bond portfolios. And technically, if they have to sell those bonds at market value, they could become insolvent. And he says that’s how contagion could spread.

David Bassanese, Betashares chief economist: Whether it’s systemic or not, I think, you know, remains to be seen. I mean, the thing is they’ve they’ve basically bailed out anyone with a bank deposit. But what they haven’t bailed out is bank shareholders, bond holders. And so, you know, bank vulnerability, I think, to the increase in interest rates is going to, you know, may well become an issue over the next few months.

Nassim Khadem: While this collapse is different to, you know, the investment banks that collapsed during the GFC, if credit conditions freeze up business access to credit, that could cause a major fall in confidence and that falling confidence could see a hard landing for the US economy. Now that hard landing for the US economy obviously then has implications for other countries, including Australia.

Sam Hawley: Mhm. So what has Jim Chalmers, our Treasurer, had to say about this. Should we be worried?

Nassim Khadem: So Treasurer Jim Chalmers said they’re aware that Australian firms are impacted and that the Government’s monitoring potential impacts for Australians caught up in this collapse. But obviously the regulators stepped in to protect deposits and that includes firms in Australia who have deposits with that bank. And he says the initial advice that they’ve received from regulators is that any fallout for Australia’s broader financial system is unlikely to be significant.

Sam Hawley: Nassim Khadem is a business reporter with ABC News. The latest bank to run into trouble is the Switzerland bank Credit Suisse. After fears the bank would run out of money, investors dumped stock sending its shares tumbling. Industry experts here have said they’re confident a bank collapse won’t happen because the local system is well capitalised. But they agree it could be a factor against the RBA raising interest rates again next month. This episode was produced by Flint Duxfield, Sam Dunn and Chris Dengate, who also did the mix. Our supervising producer is Stephen Smiley. I’m Sam Hawley. ABC News Daily will be back again on Monday. Thanks for listening.