Christopher Niesche: Will the Silicon Valley Bank collapse cause judders down under?

The collapse of Silicon Valley Bank in the US sent shudders through financial markets around the world, including Australia.

But this doesn’t look like a Lehman Brothers moment and this bank collapse won’t paralyse the global financial system and tip the world into recession.

In fact, in Australia, it will ultimately have little impact on the corporate sector, although it could also cause the price of home loans to rise.

Certainly, there is very little chance of any Australian bank collapsing, which of course is also good news for New Zealand, given the fact that Australian banks also own the biggest banks across the Tasman.

There are a few reasons why we’re not going to see a Silicon Valley Bank-style collapse in this country.

SVB collapsed because it had invested its customers’ deposits in fixed-income securities – mainly US Treasury bonds and mortgage bonds. As interest rates rose, the value of those securities fell. At the same time, its tech customers were struggling for cash as investors lost faith in the tech sector, so went to SVB to withdraw their deposits.

This in turn forced SVB to sell some of those bonds, at a loss of US$1.8 billion ($2.9b) which left it trying to raise additional capital from investors, but spooked investors didn’t come to the party. Next, the failed capital raising spooked the bank’s tech depositors who then rushed to take their money out in a classic bank run and SVB didn’t have the cash to meet its obligations, so collapsed.

There are a whole lot of factors in that story that simply don’t apply in Australia.

Australian banks mostly invest their deposits in home mortgages and corporate debt and much of this is on floating-rate loans, so they’re not losing value like bonds are.

Nor does Australia have banks that focus on one sector, thankfully. We might be facing a different outcome if, for instance, we had a bank that lent mostly to property developers, for instance.

Australia also has tougher bank regulation than the US.

The Australian Prudential Regulation Authority has in place incentives for banks to ensure significant buffers on their balance sheets that will provide a lot more breathing space should conditions worsen.

And importantly, APRA is the only regulator. In the US, a bank can choose to be regulated by the Federal Reserve Board, the Comptroller of the Currency, or a state-based regulator, and it’s no surprise that banks choose whichever regulator will best suit their circumstances.

Certainly, the ratings agencies aren’t nervous about Australia’s banks. In a note to investors on Friday, ratings agency Fitch said few banks in Australia had deposit profiles similar to SVB that left them vulnerable to a run.

As for Australian tech companies, a few had cash on deposit with SVB – US$12.2b for Nitro Software and A$10 million for SiteMinder. But with the US government having promised to make depositors whole, there won’t be any lasting effect.

And it might yet prove to be good news for Australian mortgage holders, at least in the short term.

Financial markets are betting that the collapse and the jitters it sent through world markets – alongside those from other US regional banks’ and Credit Suisse’s recent troubles – will lead to a lower peak in interest rates. Interest rate futures are already pricing in a 60 per cent chance that the Reserve Bank of Australia won’t lift interest rates in Australia, a small reprieve for home loan borrowers.

But that might well be a short-term reprieve.

Australian banks need to borrow money overseas in the bond market to get some of the cash they need to lend to homebuyers. Australian bond yields rose last Thursday night as international markets responded to the crisis at Credit Suisse, climbing 17 basis points. This continued throughout Friday, with yields further climbing across long and short-dated bonds.

If these conditions persist – or worsen – when the banks need to tap into global bond markets to renew their funding they’ll have to pay more and will likely pass on at least some of the rise to homeowners in higher mortgage rates.

It will depend on how deep the global fallout from the SVB collapse and the wobbles being suffered by Credit Suisse. In particular, bond markets will be closely watching other US regional banks to see how deep the US banking sector’s problem runs. The problem is that each bank failure feeds on itself and erodes confidence in the banking sector, which prompts depositors to take out the cash and stops investors from providing financial support, and so more banks then are at risk of a bank run.

In Australia, homeowners would end up paying more for their mortgages as money is harder to come by and global interest rates rise. At the same time, banks’ profit margins would shrink, because they would be paying more for their money and could only recoup some of it from home borrowers.