U.S. Bank Failures - How It Happened
Well I think it’s fair to say that we’ve had a few turbulent days over the last few weeks, not helped by the bank collapses in the United States.
Thank goodness it’s not a common occurrence but banks do fail on occasions. As we've seen recently, as bad as it's been, it's not fatal even though some will convince you that it is.
First of all, there’s a simple three step process as to how banks are supposed to work and it’s worth looking at these below:-
- You deposit cash in the bank, along with a lot of other people
- The bank invests most of that cash in assets and loans to earn a profit
- The bank’s job is to keep those investments safe and liquid enough to satisfy depositors who want to withdraw their money
Silicon Valley Bank Collapse
In the case of the Silicon Valley Bank, this was the first bank to fall over. It was the 16th largest bank in the US by deposits collapsed (and the second-biggest bank failure in US history).
Silicon Valley Bank did a great job bringing in deposits, specialising in the venture capital community and their portfolio companies. Where Silicon Valley messed up was on the investing side by betting on assets that had greatly dropped in value when they were forced to sell.
Silicon Valley Bank was part of the S&P500 Index, meaning most KiwiSaver funds would have had exposure to it. ANZ had $41 million invested in the bank and Milford Funds had $16 million there.
In real terms though, these losses have had very little impact due to the fact that Silicon Valley Bank made up only a tiny portion of the index. The fall in the market due to nervousness over the collapsed bank hit investors harder than the actual loss of money.
Signature Bank Collapse
This bank collapsed on the 17th March and we do know that Fisher Funds had exposure to this bank, and has lost around $80 million. Fisher Funds had reduced its Signature Bank holdings since the last disclosure statements in October.
In reality, Fisher Funds only had a very small investment in Signature Bank – between 0.2% and 0.6% depending on the fund. To put this into perspective, for a customer with $50,000 invested in their KiwiSaver Growth Fund, their total loss was only about $320.
What Did the Regulators Do?
United States Regulators including the Federal Reserve, the Federal Deposit Insurance Corp. and the Treasury Department agreed to help the banks by giving depositors full access to their money from Monday 21st March. They also said they would protect all the depositors of Signature Bank, that was forced to close on Sunday.
What the regulators have actually done here is to help the depositors, not the banks.
They’ve rescued depositors in banks that made some bad decisions over the course of the last year or so. That means investors, employees or others who were making money from these institutions are out of luck and wont be able to touch any of the money the government will be using to make depositors whole. Hence, there’s no recourse for any of our New Zealand companies who were invested in these institutions.
Why Things Aren't So Bad...
Yes I do really believe this and here’s why…
KiwiSaver and Managed Funds are well-diversified and typically have less than 1% of their funds invested in any company so the reality is that when the likes of Silicon Valley Bank or Signature Bank fall over, the net effect in minimal.
Diversification is a key strategy in managing investments and minimising risk. By investing in various companies across different industries and countries, KiwiSaver and managed funds can spread their risk and reduce the impact of any one company's downfall.
Remember also that these funds are managed by professional fund managers who continuously monitor the performance of their investments and make changes accordingly. If a company's performance deteriorates, the fund managers will likely reduce their exposure to that company and invest in other opportunities that offer better returns.
While the news about these funds losing money due to the downfall of Silicon Valley Bank and Signature Bank may be concerning, it's important not to panic. It's also essential to keep in mind that investing is a long-term strategy. Markets will inevitably have their ups and downs, but history has shown that they tend to recover over time. Investors can often weather short-term fluctuations and achieve their financial goals by staying invested and sticking to a long-term strategy. Ultimately, it's important to remain calm and rational and not let sensational news stories dictate your investment decisions.