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. This is most definitely a sign of a slowing global economy and the question now is, what’s next?
Look, I know that introduction certainly sounds like a fear-mongering hit piece, but it’s not. We’ve seen time and time again that humans have a surprising ability to overcome even the most obscene challenges. Yes, we’re including the ones we cause ourselves and then are able to somehow crawl our way out of them.
So this article is not in fact all doom and gloom. In the case of SVB, things have gone horribly wrong, but measures were in place to minimise damage. We’ll be looking at what happened (from what we know so far). Moreover, we track how markets and your KiwiSaver account were affected. We cover the ripple effect and lastly, a short comparison to the GFC.
What Happened?
While most people hadn’t heard of Silicon Valley Bank, it was in fact the 16th largest bank in the US. It mainly served as a lender and banking institution to startups and venture capitalists.
As investment capital grew to record highs over the course of the pandemic, so did SVBs assets. Euronews reports that by the end of 2022, it had $209 billion in assets and $175.4 billion in deposits.
While interest rates were at record lows, SVB used funds to invest in bonds amongst other things. However, as interest rates rose, the value of those bonds dropped below the purchase price. Now, this wouldn’t be a problem if the bonds remained in place and were allowed to mature. The issue here is that if their customers want to withdraw more money than the bank has in cash, they will have to sell these bonds at a loss to accommodate the withdrawal requests.
That is exactly what happened when SVB announced it had sold some assets at a loss of almost $2 billion. Investors got weary of the bank’s solvency concerns and depositors raced to withdraw funds before US regulators took control.
Just 2 days after SVB imploded, the third-biggest bank failure happened with the collapse of New York-based Signature Bank. It was a similar story with regulators stepping in, seizing assets, and giving senior management the boot.
Since then, US President Biden reassured the public as well as customers that this is a contained case and that all SVB customer deposits would be available. However, investors would have to bear the cost of the stock being now worthless. That is compared to a share price of $267.83 USD on Wednesday, 8 March 2023.
How The Market Reacted
As you can expect, it certainly caused some panic in the financial markets as well as overall banking confidence. Shockwaves were felt throughout the banking sector and containment was on the agenda of 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 will have been a small percentage of total funds. That is because of the diversification strategy most large investment firms follow to hedge against volatility and scenarios like this. Very rarely will providers have invested more than 3% of total funds in any single company. You can actually check this by accessing KiwiSaver through your provider’s portal. If you are with Milford for example, go to your Milford KiwiSaver login and locate the top securities invested in by your chosen fund. Therefore, if the company goes down, such as in the case of SVB, your exposure is minimised.
In hindsight, it is easy to criticise the fact that any money was being invested in a company that seemingly had problems. KiwiSaver investment companies have teams of financial experts specialising in risk analysis. However, it is impossible to predict the future performance of investments with 100% certainty. That is why a diversified portfolio helps as a hedge against unforeseen company failures.
That is not to say that my KiwiSaver (and likely yours too) didn’t suffer from this news. Confidence in the investment market took a hit globally, and thus 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 is not a great idea to withdraw or change KiwiSaver when you’re down. Get professional KiwiSaver advice and an account Health Check before making any decisions.
History Repeating?
As much as industry insiders and regulators say this time is different, it certainly has investors and depositors worried. At the end of the day, banks rely on people’s trust in the system in order to function. The more that depositors and investors panic, the worst the situation becomes.
An article in NZ Herald states that almost 200 more US banks are at risk of seeing a similar fate to SVB. That is according to a study done that projects 186 banks across the US could fail if half of their depositors withdrew funds quickly.
That would be an economic meltdown that will once again shake the banking system across the world. While many economists are already foreseeing a global recession in the very near future, this could make things much worse.
There is also an optimistic view of what is currently unfolding. Regulators took control of SVB very quickly and assured depositors that all their funds would be returned. There have been a few other steps taken to boost confidence in the banking system. From President of the United States, Joe Biden, addressing the situation swiftly and reassuring consumers, to central banks increasing cash flow.
One would expect that regulators and banks will have learned from the 2008 GFC and take the right measures to avoid another widespread collapse.
Regardless, we felt it was 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 reassure any concerns you may have.