SVB and Signature failure prompts APRA to examine local banking exposure

Australia’s banking regulator is stepping up its supervision of the local sector in the wake of SVB’s collapse.

APRA, led by chair John Lonsdale, is stepping up its scrutiny of domestic financial institutions. Picture: Chris Pavlich

Australia’s banking regulator is intensifying supervision of the local sector in the wake of Silicon Valley Bank’s collapse, which has entangled ASX-listed technology companies, investment firms and potentially local sellers on online marketplace Etsy.

The Federal Reserve, US Treasury and the Federal Deposit Insurance Corporation moved to guarantee all deposits at SVB and another failed financial institution Signature Bank on Monday Australian time, seeking to instil some calm in financial markets over the potential for further runs on banks. That measure went beyond regulators backing the standard threshold of up to $US250,000 in deposits.

The demise of SVB has had ramifications in markets around the world, given it was a go to bank for the technology and start-up community. HSBC Holdings late on Monday announced it was snapping up SVB’s loans and deposits in the United Kingdom for a nominal sum of £1. SVB UK had a loan book of £5.5bn and deposits of about £6.7bn.

In Australia, regulators were on alert for any direct or indirect exposures to the failed US banks – which they expected to be limited – within the local banking and superannuation sectors.

An Australian Prudential Regulation Authority spokesman said: “APRA is closely monitoring the situation and potential impacts for the Australian financial system caused by the collapse of the Silicon Valley Bank in the US on 10 March 2023.

“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.”

The regulator is also working with other Council of Financial Regulators agencies to assess whether the US bank‘s collapse has any other local ramifications. A spate of local start-ups outed themselves as customers of SVB on Monday.

“Australia’s financial system is strong, our banks are resilient, well capitalised and have strong liquidity coverage,” APRA‘s spokesman said.

In January, the nation’s banks had to align with APRA’s updated “unquestionably strong” capital requirements, which made Australian standards consistent with the internationally agreed Basel III requirements.

Domestic Australian banks also have some protection from market upheaval and stress events due to APRA’s Liquidity Coverage Ratio, which requires financial institutions hold high-quality liquid assets, that amount to or equal an estimate of a bank’s short-term net cash outflows under a situation of significant stress.

But APRA’s statement on Monday didn’t halt the decline across major bank stocks with ANZ leading the sector lower as its shares fell 1.93 per cent.

Analysts at Morgan Stanley noted that the events of recent days could prompt US regulators to reassess their liquidity requirements for smaller banks in that market, which already apply to their larger rivals.

“The largest banks are subject to Liquidity Coverage Ratio (LCR) rules, and all banks go through a liquidity stress test. We expect requirements will likely get tougher, particularly for banks that don’t have to comply with the LCR,” they said. “This means more cash and more shorter-term securities.”

SVB – which focused on banking and lending to start-ups – collapsed on Friday in the US, marking the second-largest bank failure in that market’s history. The bank’s failure came after a run on deposits and ill-timed bond investments.

Companies including Stripe and Etsy also relied to some extent on SVB for banking relationships, and in the latter’s case distributing funds to end sellers using its platform.

Online marketplace Etsy was caught up in the demise of SVB as many largely US sellers using the site to sell their products have reported they weren’t receiving their usual payments. Two local Etsy sellers canvassed by The Australian said they were confused as to whether their payments from Etsy would be made over the next 24 hours, and neither had received any communication around the collapse of SVB.

Etsy – which houses millions of sellers around the world – told NBC the collapse of SVB was causing delays in processing payments. The company did not respond to a request for comment on Monday.

Investment firms including Hamilton Lane – which markets to Australian investors – appeared on a long list of firms that use SVB as a custodian over the weekend. Separately, Bloomberg reported that Pengana International Equities said about 2 per cent of its portfolio reflected a holding in SVB. Other Australian firms may have exposure to SVB through the bank’s bonds.

While depositors will have their funds held with SVB returned, those with funding lines or debt with the bank may have to navigate a more challenging period ahead.

Morgan Stanley analysts said the ructions at SVB and Signature suggested US banks would now seek out more diversified and longer-term mix of funding. They also highlighted the increased cost of deposit funding for banks as US rate hikes continued.

“In a world with sharp increases in the Fed funds rate and Quantitative Tightening (QT), the cost of deposit funding has gone up quickly and more deposits are leaving the banking system. Treasuries/money market funds present an attractive alternative to investors looking for a low-risk avenue to deploy their liquidity,” the analysts said. “This makes sticky, core, operating deposits even more valuable for banks. Competition for these deposits is likely to increase.”

Competition for deposits in Australia is also tipped to intensify given the Reserve Bank’s aggressive rate rising cycle and a regulatory inquiry that will assess how the major banks are passing on hikes to savers.

After publication, an Etsy spokeswoman said: “At Etsy, supporting our sellers is our highest priority, and we understand how important it is for these small businesses to be able to receive their funds when they need them.

“We recently experienced a delay in issuing payments to a small group of sellers related to the unexpected collapse of Silicon Valley Bank -- approximately 0.5 per cent of our active seller base had their payments delayed on Friday. We are working to pay these sellers today and we’ve already started processing payments via another payment partner this morning.”

Additional reporting: Jess Malcolm