Mid-March Newsletter

Good afternoon,

You may have been aware of the news surrounding Silicon Valley Bank (SVB), and a rival Signature Bank, both went into a US Government controlled wind down.

SVB a bank that caters to many of the world's most powerful tech investors was taken over by federal regulators, becoming one of the largest lenders to fail since the 2008 Global Financial Crisis.

Why is the SVB bank in trouble now?

In recent months, many of SVB’s clients (technology sector companies) had been withdrawing more money than usual. The bank stated that in order to cater for those withdrawals, it had to sell part of its bond holdings at a steep loss of $1.8 billion at the same time the US Federal Reserve [1] raised interest rates.

Investors at both banks have got worried about their viability and proceeded to withdraw even more money from the banks — a textbook definition of a "bank run".

What do these failures mean for NZ investors?

Analysts have suggested that despite initial panic on Wall Street, these collapses are unlikely to set off the kind of domino effect that gripped the banking industry during the Global Financial Crisis.

In order to restore confidence in America’s banking system, US Treasury Secretary Janet Yellen, Chairman of the Federal Reserve Jerome Powell and Federal Deposit Insurance Corporation (FDIC) Chairman Martin J. Gruenberg released a joint statement on Sunday US time. They announced FDIC will make Silicon Valley Bank and Signature Bank’s customers whole by guaranteeing all deposits including all uninsured deposits.

“The system is as well-capitalized and liquid as it has ever been,” Moody’s chief economist Mark Zandi said. “The banks that are now in trouble are much too small to be a meaningful threat to the broader system.” (CNN, 2023)

No Need to Hit the Panic Button

Whilst we cannot know if other banks in the US are at risk, the US Government has sent a signal to US deposit holders that withdrawing money in response to fear is unnecessary.

For our clients, the direct exposure to these banks in our share portfolios is minimal, between 0.03% and 0.04% depending on the underlying fund. That translates into about 3 - 4 cents for every $100 invested. These small exposures show the benefit of wide diversification across many businesses and industries.

As you are reading this, markets have already priced in this news and the actions of the US government seem to have gone a long way towards calming markets. As always, we encourage investors to look past periods of short-term volatility, which in the long run are unlikely to impact your plan.

If this has sparked any questions you would like us to address, we are only a phone call or an email away. Please get in contact with us on 0800 NO STRESS (0800 667 873) or email at info@foxplan.nz if you have any questions or would like your adviser to talk through your current investment plan.

Kind Regards,

The FoxPlan Team

[1] The US equivalent of New Zealand’s Reserve Bank