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Market Update Global Banking System Volatility

Updated: Jun 30, 2023

Market volatility has been elevated over the past week driven by the failure of the Silicon Valley Bank (SVB)

The unfolding situation in the US could be construed as having echoes of the Global Financial Crisis (GFC). This, combined with recent falls in Credit Suisse shares (which appear to be unrelated to the US mid-tier banks), have continued to put jitters into the banking sector. It is important to note, however, that despite the SVB’s failure being the second largest in US history, when put into perspective, it’s assets are less than one tenth of J.P.Morgan’s, one of the major players in the US banking system. Considering the rapidly developing situation, the US Federal Deposit Insurance Corporation (FDIC) has already taken control of the SVB to navigate the collapse in the best interest of the financial system. Further announcements from the U.S. Treasury have sought to calm the broader market of the financial system’s health and to reassure the market that the relevant tools are available, however stating there will be no GFC-style bailout, nor will one be necessary. The US financial system is considered to be well capitalised overall. According to Mark Zandi, Moody’s Chief Economist, the size of the smaller banks at risk is not likely to pose any threat to the financial system overall.

How it happened

  • SVB has been operating in a relatively unusual manner. Instead of lending the deposits received, the Bank invested in long dated fixed interest rate bonds. This exposed the Bank’s assets to significant interest rate risk which was not sufficiently hedged.

  • Given rising interest rates, the value of the bonds held to cover customer deposits have fallen significantly. The need to sell fixed interest rate securities to cover the withdrawal requests resulted in realised losses.

  • Earlier in the month a single sale resulted in a $1.8 billion loss which led the Bank to raise capital to increase the balance sheet health. This capital raise failed, which prompted customers with deposits with the Bank to withdraw their funds, resulting in a run on the Bank.

  • Within 48 hours the Bank was bankrupt with the FDIC taking control of the Bank.

  • Since then, the US Federal Reserve and the US Government have guaranteed customer funds at SVB will be paid back in full

  • More recently, major investment bank Credit Suisse has experienced a panic after the share price dramatically fell, with their banking operations coming under pressure.

  • Overnight, the Swiss National Bank and the Swiss financial regulator announced support for the Bank announcing that “Credit Suisse meets the higher capital and liquidity requirements applicable to systemically important banks” and confirmed they will “provide liquidity to the globally active bank if necessary”.

What To Do?

This current market volatility, while significant, does not alter our long-term views on how portfolios are positioned. It is important to manage your portfolio in line with your long-term objectives, aligned to your risk tolerance and to that end we would encourage you to discuss your portfolio with us.

For further information, please contact your Aspiram financial adviser:

Aspiram Financial Planning is an authorised representative of: RI Advice Group Pty Ltd, AFSL No. 238429 ABN: 23 001 774 125 Suite 204, Level 2, 83 Flushcombe Road Blacktown NSW 2148 PO Box 8454 Blacktown NSW 2148 Telephone: 02 9621 6111

This document is prepared by Actuate Alliance Services Pty Ltd (ABN 40 083 233 925, AFSL 240959) (‘Actuate’), a member of the Insignia Financial group of companies (‘Insignia Financial Group’). The information in this document is general advice only and does not consider the financial objectives, financial situation or needs of any particular investor. Before acting on this report, you should assess your own circumstances or seek personal advice from a licensed financial adviser. This document is current as at the date of issue but may be subject to change or be superseded by future publications. The content is current as at the date of issue and may be subject to change. In some cases, the information has been provided to us by third parties. While it is believed that the information is accurate and reliable, the accuracy of that information is not guaranteed in any way. Past performance is not a reliable indicator of future performance, and it should not be relied on for any investment decision. Whilst care has been taken in preparing the content, no liability is accepted by Actuate or any member of the Insignia Financial group, nor their agents or employees for any errors or omissions in this report, and/or losses or liabilities arising from any reliance on this report. This report is not available for distribution outside Australia and may not be passed on to any third person without the prior written consent of Actuate


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