Quickly labeled as the biggest failure since the Global Financial Crisis (GFC), US regulators rushed to seize the assets of Silicon Valley Bank (SVB) late last week.
While very few see it as a repeat of 2008, NZ and KiwiSaver are not immune from the ripple effects. Upon KiwiSaver sign up, you are made aware of the risk exposure of your chosen fund. Price hikes, high-interest rates, and fearful investors have made headlines worldwide. The construction industry coming to a near-total collapse in China, and the prolonged Russian war on Ukraine has added fuel to the fire. Is this a sign of a slowing global economy and if so, the question is, what’s next?
At first glance, the introduction may come off as fear-mongering, but it’s not intended that way. Time and time again, we’ve witnessed humanity’s remarkable ability to overcome even the most extreme challenges—including those we bring upon ourselves—and somehow find a way to rise above them.
This article isn’t all doom and gloom. While things went terribly wrong with SVB, there were measures in place to minimize the damage. We’ll explore what happened (based on what we know so far), track the impact on markets and your KiwiSaver account, examine the ripple effect, and provide a brief comparison to the GFC
What Happened?
While most people hadn’t heard of Silicon Valley Bank (SVB), it was actually the 16th largest bank in the U.S. It primarily served as a lender and banking institution for startups and venture capitalists.
As investment capital surged to record highs during the pandemic, so did SVB’s assets. By the end of 2022, it had $209 billion in assets and $175.4 billion in deposits, as reported by Euronews.
While interest rates were at record lows, SVB invested heavily in long-term securities, including bonds. However, as interest rates rose, the value of these bonds declined below their purchase price. This wouldn’t have been a problem if the bonds could be held to maturity, but the issue arose when customers tried to withdraw more funds than the bank had in cash. To meet these withdrawal requests, SVB had to sell these bonds at a loss.
That’s exactly what happened when SVB announced it had sold assets at a loss of nearly $2 billion. Investors became concerned about the bank’s solvency, and depositors rushed to withdraw their funds before U.S. regulators stepped in.
Just two days after SVB’s collapse, the third-largest bank failure in U.S. history occurred with the fall of New York-based Signature Bank. It followed a similar pattern, with regulators seizing assets and removing senior management.
Since then, President Biden reassured the public and customers that SVB’s situation was contained and that all customer deposits would be protected. However, investors were left to bear the cost, as SVB’s stock became worthless, dropping from $267.83 USD on Wednesday, 8 March 2023, to near zero just days later.
How The Market Reacted
As expected, it caused significant panic in the financial markets and undermined overall banking confidence. Shockwaves rippled through the banking sector, with containment becoming a priority for both regulators and the industry itself.
Source: CNBC
The graph above highlights the drop in the value of the S&P 500 financial sector following the SVB collapse. However, the effects were felt globally and beyond the banking sector. Even the NZX50 Index dipped following the news. And yes, your KiwiSaver investment was likely impacted too.
Let’s take a look:
Source: Google Finance
While both the Nasdaq and Dow Jones indexes took a hit following the news, Nasdaq has seemingly recovered the losses. And relating back to KiwiSaver funds, if your provider had invested in a Dow Jones index fund, you can see how performance will have taken a hit within this 1-month time period.
Source: Google Finance
We can also see how the drop in confidence for financial markets worldwide has dropped by tracking local Australasian Indexes. Both the ASX200 and the NZX50 indexes took a hit following the SVB collapse and are yet to come back. Once again, it’s best you don’t look at your KiwiSaver login right now…
In short, markets are volatile across the board at the moment. Of course, market values go up and down not only based on facts but also on investor confidence. As much as regulators and industry leaders reassure us and global investors that everything is okay, the market ultimately decides.
Almost all KiwiSaver investment options are exposed to a certain extent to market volatility. So let’s touch on the likely effect of this event on your KiwiSaver.
The Ripple Effects On Your Investment
The exposure to SVB or Signature Bank stocks was limited and minimal for KiwiSaver providers across the board. Although your KiwiSaver scheme may have invested in these companies, it would have been a small percentage of total funds. This is because of the diversification strategy most large investment firms follow to hedge against volatility and scenarios like this. Very rarely do providers invest more than 3% of total funds in any single company. You can check this by accessing your KiwiSaver through your provider’s portal. For example, if you’re with Milford, go to your Milford KiwiSaver login and locate the top securities invested in by your chosen fund. Therefore, if a company fails, like in the case of SVB, your exposure is minimised.
In hindsight, it’s easy to criticise the fact that any money was invested in a company that seemingly had problems. KiwiSaver investment companies have teams of financial experts specialising in risk analysis. However, it’s impossible to predict the future performance of investments with certainty. That’s why a diversified portfolio acts as a hedge against unforeseen company failures.
That’s not to say that KiwiSaver members didn’t suffer from this news. Confidence in the investment market took a hit globally, and many other companies that your KiwiSaver funds were invested in dropped in value. So, you could definitely say there was a ripple effect that impacted your KiwiSaver investment. How much depends on the makeup of your KiwiSaver funds.
However, like most blips in the economy, it’s not advisable to withdraw or change your KiwiSaver when you’re down. Get professional KiwiSaver advice by completing National Capital’s KiwiSaver HealthCheck before making any decisions.
History Repeating?
As much as industry insiders and regulators insist that this time is different, it has certainly left investors and depositors worried. At the end of the day, banks rely on people’s trust in the system to function. The more depositors and investors panic, the worse the situation becomes.
An article in the NZ Herald states that nearly 200 more U.S. banks are at risk of facing a similar fate to SVB. According to a study, it is projected that 186 banks across the U.S. could fail if half of their depositors withdrew funds quickly.
That would trigger an economic meltdown that could once again shake the banking system globally. While many economists are already forecasting a global recession in the near future, this could make things much worse.
However, there is also an optimistic view of what is unfolding. Regulators took swift control of SVB and assured depositors that all their funds would be returned. There have also been several other steps taken to boost confidence in the banking system—such as U.S. President Joe Biden addressing the situation quickly and reassuring consumers, and central banks increasing cash flow.
One would expect that regulators and banks have learned from the 2008 GFC and will take the necessary measures to avoid another widespread collapse.
Regardless, it is important to break down what is happening and how it relates to KiwiSaver. Changing KiwiSaver companies or funds shouldn’t be a rash decision. Professional KiwiSaver advice may be just what you need to address any concerns you might have.
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