Markets bet US bank collapse could slow RBA interest rate rises

Financial markets are betting the dramatic failure of Silicon Valley Bank will result in a lower peak in Australian interest rates than previously expected, as the US government took sweeping action to calm market fears and ward off the threat of more bank runs.

In the biggest US bank collapse since the 2008 global financial crisis, regulators put Silicon Valley Bank into receivership over the weekend, sparking fears about the potential for fallout in the US banking sector and on global markets.

The failure of Silicon Valley Bank prompted markets to bet on less aggressive interest rate rises.Credit:Bloomberg

On Monday morning (AEDT), those fears abated somewhat after the US government vowed no depositors would lose money in the collapse and the US Federal Reserve launched a program to provide emergency funds to American banks. Regulators also shut down New York-based Signature Bank, saying depositors of this institution would not lose funds either.

Australia’s top banking regulator sought to calm investors’ nerves by saying local banks had “limited” links to Silicon Valley Bank, and investors played down the chances of the collapse sparking a major financial dislocation.

Even so, the collapse of SVB, which was the 16th largest bank in the US, caused markets to rein in their expectations about how aggressive central banks will be in raising interest rates further, including in Australia.

Bank stocks on Wall Street fell sharply overnight but the benchmark S&P 500 index dipped by only 0.2 per cent on hopes the Federal Reserve will take it easier on its economy-rattling hikes to interest rates.

ANZ Bank senior economist Felicity Emmett said futures markets on Monday were pricing in a peak in the RBA cash rate of 3.83 per cent, which was 0.14 percentage points lower than was previously priced in. Emmett said this pricing suggested there could be a pause in RBA’s rate rises in April or May.

“Obviously markets are alert to the prospect of a bit more market contagion, and the global financial crisis is probably still in the back of their minds,” Emmett said.

Despite the moves in money markets, experts suggested the episode was fundamentally different to GFC-era collapses such as those of Lehman Brothers and Bear Stearns. Bank-watchers highlighted company-specific reasons for SVB’s demise, including its heavy exposure to the struggling technology sector.

Emmett said ANZ still believed there would be another two rate rises from the RBA. “Our view at this stage is that the contagion will be quite limited and that it’s unlikely to impact the Fed or the RBA,” Emmett said.

Major bank shares helped to drag the Australian sharemarket lower on Monday, with the ASX 200 index declining 0.5 per cent to 7108.8. Some ASX-listed technology companies including Nitro Software, hotel software platform Siteminder, and buy now, pay later business Sezzle said they held deposits with SVB.

David Kirk, co-founder of tech-focused investment fund Bailador, which has investments in Siteminder, said he did not think there would be “systemic issues” caused by the collapse and interest rates of about 4 to 5 per cent from a bank were “not high”.

“My view is everybody had just got to learn to operate and manage their business for long-term 4 to 5 per cent cost of money,” Kirk said.

Australia’s banking peak body, investors and the local regulator all highlighted stark differences between SVB and Australian banks.

The Australian Prudential Regulation Authority (APRA) said: “While the Australian banking industry has limited connections with the US-based Silicon Valley Bank, APRA is intensifying supervision of the local banking industry and is seeking more information from them on any potential impacts.”

Principal at fund manager Alphinity, Andrew Martin pointed to SVB’s concentrated customer base in the tech sector, and the fact that an unusually large share of its assets were bonds, rather than bank loans. As squeezed tech businesses started withdrawing their deposits, SVB was forced to sell a $US21 billion bond portfolio at a $US1.8 billion loss last week.

“It’s incredibly hard to see – other than if it causes lower confidence in the system and people start running on other banks – how it’s a systemic issue on its own,” Martin said.

In a further move by regulators to stop the collapse from escalating, the Bank of England on Monday night said global giant HSBC was buying the UK arm of Silicon Valley Bank for £1.

The Bank of England said in a statement the sale would stabilise the SVB business in the UK, minimising the disruption to the technology sector and supporting confidence in the financial system.

HSBC said the UK arm of SVB had loans of about £5.5 billion ($9.9 billion) and deposits of about £6.7 billion, and the transaction would be completed immediately. The Australian Banking Association on Sunday night also highlighted the differences between SVB and Australia’s lenders, noting the US bank’s high exposure to technology companies.

“Australia’s banks in contrast are strong and subject to a different set of regulatory frameworks. ABA members are well diversified and therefore well positioned in the event that one sector experiences challenging financial circumstances,” the ABA said.

With Nick Bonyhady

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