Bank collapse: Local shares fall on Silicon Valley Bank contagion fears

The New Zealand stock exchange has opened 1.3 per cent down this morning as investors digested the fallout from the US$300 billion collapse of California’s Silicon Valley Bank (SVB).

It was too early to say just how widespread the impact of the failure would be, said equities director and portfolio manager at Harbour Asset Management Shane Solly.

“There is a contagion risk,” he said. “Unfortunately people will lose money.”

But local markets weren’t panicking and the reaction was largely expected, he said.

Two locally listed firms - IkeGPS and Comvita - have direct exposure to the losses with $5.3 million and $2.23m respectively.

The biggest losers so far this morning were Vulcan a2, Air New Zealand and Serko.

Although a tech company, Serko said it was not a customer of SVB and most of its short-term deposits were with New Zealand trading banks.

SVB, which provided banking services to half of all venture-backed tech and life sciences companies in the US, collapsed on Friday in the US (Saturday morning NZT) rattling investors and bringing back memories of the global financial crisis in 2008.

The US government announced on Monday morning NZT, that all Silicon Valley Bank clients would have access to funds, according to the Associated Press.

On Friday the US S&P closed down 1.5 per cent, taking its losses for the week to 4.5 per cent, the worst week in almost six months.

The technology-based Nasdaq Composite fell by 1.8 per cent on the day and 4.7 per cent lower for the week.

SVB was a lender to Silicon Valley start-ups.

The bank had seen massive growth over the last four or five years - supported by tech startups that performed well in the low-interest-rate Covid era.

ANZ chief economist Sharon Zollner described the collapse as an illustration of “the damaging real economic price of high inflation.

“As the Fed has raised rates aggressively in response, start-ups have been hammered and SVB, with its tech-heavy depositor base, saw money start to exit,” she said.

“SVB then had to realise losses on some of its extremely high holdings of Treasuries, built up after prior years’ super-strong deposit growth that had well-outpaced lending. An old-fashioned bank run did the rest.”

From here the US Fed was expected to carefully scrutinise the fall-out from SVB’s failure.

“But from a macro perspective, if SVB does not pose systemic risks, and its troubles arose from bespoke risks, as appears to be the case, it does not make sense for the Fed to alter course and allow the inflation problem to become more embedded,” Zollner said.

The strong rise in February job numbers in the US pointed to the need for a return to 50bp hikes.

“The debate will no doubt rumble on over the next week, but if capital has been misallocated owing to prolonged QE and zero interest rates, then a period of Schumpeterian creative destruction is necessary – and could help dampen inflation.

Austrian economist Joseph Schumpeter was an advocate of the need for creative destruction, (sometimes described as a ‘forest fire’ analogy), which views dramatic market meltdowns as an inevitable and sometimes necessary part of the economic cycle.

“The course of true disinflation never did run smooth,” Zollner said.

Mark Lister, investment director at Craigs Investment Partners, said the news from the US was likely to make for a nervous start to the week.

“It is obviously a developing story, so more will come to light I’m sure, but markets are certainly going to start the week on the back foot and in a negative mindset until they get some comfort that this sort of issue is isolated - if it is ringfenced - and that it is dealt with,” he said.

“Even if it is a small bank, in the scheme of things - which it is - a bank failure is still a big deal.

“You don’t see them every day and we haven’t seen one for more than 10 years.

“One would think that finances of those involved in that sector - whether its individuals, customers or investors - would be quite intertwined.”

Lister said the SVB’s failure comes at a time when bearish factors - high-interest rates, high inflation and low growth - were already weighing on the markets.

“It will see us start the week on a cautious footing before we get some more clarity.”

Trading in the US financial markets restarts on Monday night (NZ time).