The second-largest bank collapse in United States history has been making waves these past few days. As the situation develops, the attention of Australian investors could be turning to our own bank shares within the S&P/ASX 200 Index (ASX: XJO).
Suffering a 'bank run', Silicon Valley Bank — listed as SVB Financial Group (NASDAQ: SIVB) — found itself in the hands of regulators at the end of last week. Today, the Federal Reserve has provided reassurance that all depositors will be made whole through a measure to contain the fallout.
So, could a similar event unfold within our own major banks, or are Aussie banks in a better position?
Why liquidity matters
Firstly, the Silicon Valley Bank debacle, at its core, is a liquidity problem.
When depositors want their money back (e.g. withdraw it and move the money elsewhere), the bank needs to be able to fulfill that request.
Most of the time this isn't an issue as few people are looking to withdraw their money at any given moment. This means the bank can lend your money out in the meantime — earning you and the bank a return in doing so.
However, when everyone wants their money at once, that is when issues can arise. The problem is compounded when that money is tied up in illiquid assets.
It is for this reason that regulation exists, requiring banks to have sufficient capital buffers, especially when under the most challenging plausible conditions. Hence, banks must conduct regular 'stress tests' to evaluate whether they can operate under these theoretical conditions.
The regulations are a little different in the US, but they also require all large 'systemically important' banks to abide by strict regulations including minimum liquidity coverage ratio (LCR), net stable funding ratio (NSFR), etc.
Based on the information available, it seems Silicon Valley Bank may have escaped some requirements due to an increase in the threshold of what is classed as systemically important during the Trump administration.
To gain a greater understanding of the Silicon Valley Bank collapse, you can read more here.
How are ASX 200 bank shares placed?
As we now know, banks need liquid funds at the ready if customers withdraw their money. For Silicon Valley Bank, US$26 billion in available-for-sale securities wasn't enough to cover the outflows.
The continued withdrawals nudged the US bank to start selling its 'held-to-maturity' securities. Those securities were bonds that were estimated to be worth US$15 billion less than cost due to rising interest rates, as noted in the tweet below. As a result, the sale meant Silicon Valley Bank was now realising billions in previously unexpected losses.
This may suggest the bank's true LCR was below the traditionally expected 100% (at least in hindsight). In contrast, all major ASX 200 bank shares touted LCRs far above the required 100% level at the end of December 2022, as shown in the table below.
Bank | Liquidity Coverage Ratio (LCR) |
Commonwealth Bank of Australia (ASX: CBA) | 131% |
National Australia Bank Ltd (ASX: NAB) | 134% |
Westpac Banking Corp (ASX: WBC) | 139% |
ANZ Group Holdings Ltd (ASX: ANZ) | 126% |
Bendigo and Adelaide Bank Ltd (ASX: BEN) | 138% |
Bank of Queensland Ltd (ASX: BOQ) | 139% |
Silicon Valley Bank | Unknown* |
Furthermore, it is believed that Australian banks hold a far smaller portion of their high-quality liquid assets in tradeable securities than other countries. This might also mean a lower risk of accessing funds with unrealised gains.
Where Aussie major banks differ from Silicon Valley Bank
Another point of difference between Silicon Valley Bank and ASX 200 bank shares are their depositors.
The troubled US bank's customers were predominantly tech companies, some of which were burning through cash to fund operations. A disproportional reliance on a single sector meant the bank's deposits were crippled by the tech pain in 2022.
Major Australian banks are aware of this type of risk. Fortunately, ASX 200 bank shares hold deposits with a diversified base of customers. This should, in theory, drastically reduce the risk of a bank run getting underway in the first place.