0:03

From the newsrooms of the Sydney Morning

0:05

Herald and the Age, this is please

0:07

explained. I'm Julia Karketzel.

0:09

It's Monday, March twenty. The

0:12

collapse of Silicon Valley Bank, the

0:14

second biggest in US history has

0:17

triggered fresh fears, the entire

0:19

financial sector may be under threat.

0:22

Depositors quickly withdrew their

0:24

money from SVB and other banks,

0:26

which folded in the days following. But

0:30

should Australians be concerned about

0:32

their own financial institutions. Today,

0:36

technology editor for the Sydney Morning

0:38

Herald and the age, Nick Bonahady,

0:40

on the fragility of the financial

0:42

sector.

0:48

So Nick, tell me about Silicon Valley

0:50

Bank and how it collapsed earlier

0:52

this month. So Silicon

0:55

Valley Bank has been a great friend to

0:57

the technology sector for about forty

0:59

years. And if you talk to anyone in the startup

1:01

ecosystem, especially in Australia, they'll

1:03

tell you that when Australian

1:06

startups were seen as just this small

1:08

sideshow and they wanted to expand to America,

1:10

Silicon Valley Bank was the one that would give them the

1:13

time of day. It was the one that would do

1:15

things as simple as opening an account

1:17

so they could pay staff in America or

1:19

cutting them alone. And so thousands

1:22

and thousands of startups, perhaps as much as fifty

1:24

percent of all of the startups in America, did

1:26

their banking there. They deposited their

1:28

money lots and lots of money because startups

1:31

tend to raise huge amounts, but don't

1:33

necessarily spend that

1:35

all at once. And they don't tend to take out huge

1:37

loans either. And that created a bit

1:39

of problem for this bank as it was growing

1:42

very large and all of the money that was slashing

1:44

around the tech ecosystem in the good years for

1:46

that sector during the pandemic. Because

1:48

they needed to make some money. And

1:50

they put a lot of money, billions of dollars,

1:52

more than twenty billion dollars American,

1:54

into government bonds. And that looked like a good bet

1:57

at the time because they were paying a decent interest

1:59

rate because they lasted for so long. But

2:01

as interest rates have risen, that started

2:03

pro using a real problem. Because

2:06

now those bonds were paying out

2:08

less than you could get elsewhere and their value had

2:10

slipped a whole lot. And that started

2:12

causing worries. For the bank. Because

2:14

startups were always drawing more money as it

2:16

became harder for them for their to tap their own

2:19

investors for cash, and so they're getting their

2:21

own cash back out of the bank. Now,

2:24

just a couple of weeks ago, this all started

2:26

to come into a head because the bank needed

2:28

to cover the costs of the withdrawals of the

2:30

deposits

2:31

and so it started selling its

2:33

bonds at a substantial loss.

2:36

And when that

2:37

became public, it really kicked

2:39

off to a whole another level.

2:40

Okay. So this triggered a massive

2:43

loss in confidence from SVB

2:45

customers.

2:46

What happened next? Yeah. That's right.

2:48

There was a call where the CEO was

2:51

seeking to calm nerves. But if

2:53

there's anything that makes people panic, it's often

2:55

telling them don't panic. Things

2:57

are fine. And in an

2:59

industry like startups and venture

3:01

capital where everyone is hyper connected, where

3:03

people spend far too much time

3:06

on Twitter, or messaging apps like

3:08

Discord or Slack or WhatsApp groups,

3:11

this news spreads really fast.

3:18

When that word got out, people got

3:20

nervous. The stock in the bank started to decline.

3:23

Depositors started withdraw their other

3:25

money. When you start to have venture capitalists telling

3:27

the companies that they've invested in, hey,

3:30

we've got worries about Silicon Valley

3:32

Bank. Get your money out faster

3:34

next day. Customers withdrew forty

3:36

two billion from their accounts, leaving

3:39

SVB with a negative cash balance

3:41

of nine hundred fifty eight

3:43

million. And then that creates a dilemma

3:45

for the next wave of companies because

3:47

they think, gosh, this does seem like a

3:49

bit of an unnecessary panic. But

3:52

the panic can become real in

3:54

itself. A volatile situation

3:57

sent the stock prices of several banks

3:59

plunging Monday as regulators move to

4:01

keep bank depositors from banks that

4:03

are still open. From losing faith

4:05

in the wake of Silicon Valley banks

4:08

And so you started to have people who thought, I

4:10

really like this bank and I don't want it to fail.

4:13

But if everyone else is pulling their money

4:15

out, then the bank run can take on a life

4:17

of its own and so I better do the same

4:19

thing. The collapse of Silicon Valley

4:21

Bank had a ripple effect on a second

4:23

bank. The same sort of bank run hit

4:25

signature bank shortly after. It

4:28

had its stores slam shut as regulators

4:30

warned that keeping it open could threaten

4:33

the entire financial system's stability.

4:35

Now there were few I spoke

4:37

to a guy called Benjamin Humphrey who's

4:40

startup, who's called Dovetail based

4:42

in Sydney with about a billion dollar and that

4:44

was exactly the position he was in. He started

4:46

seeing these messages on

4:48

Friday morning Australian time, a

4:51

week before last, and thought

4:54

this is just classic fear uncertainty and doubt.

4:57

But later in that day, he decided, look,

4:59

my duties to my company, and we ought to try

5:01

and get the money out as soon as possible. And

5:03

unfortunately, at that stage, he couldn't. Because

5:05

by then, the bank was

5:08

running out of cash. Federal

5:10

regulators in America were stepping in,

5:13

closing the bank, and eventually

5:16

after weekend of real panic announcing

5:18

that they would make all of the deposit

5:20

holders' hole to try and prevent

5:22

a kind of contagion spreading across

5:25

the US financial system. One

5:33

of the most affecting stories that I heard in

5:35

all of this was when I spoke to a guy called Ben

5:37

Sand. He's a Sydney based on Triplemer

5:39

who has an AI company called Strong

5:42

Compute. And I'd been

5:44

told that Ben was on a plane. I

5:46

couldn't speak to him for a while. But when I eventually

5:48

spoke to him at about nine PM on

5:50

a Monday night, he told me

5:52

that he was in America.

5:55

And specifically, the

5:57

city of Santa Clara, which is where

5:59

Silicon Valley Bank is based. And

6:02

he'd gone there, moving up a long scheduled

6:04

trip and banning the size of his team to try

6:06

and get his money out in person. He lined

6:08

up for seven hours all night

6:11

at the front of the queue. Just

6:13

to make sure that the millions of

6:15

dollars that he had banked with Silicon Valley

6:17

Bank was safe. And when I spoke to him

6:19

the next day, it seemed like things had gone

6:21

pretty well. Had managed to

6:23

initiate a transfer of the money it was waiting

6:26

to clear and go to another bank.

6:28

But that's just an example of the intense stress

6:30

and anxiety that was placed on

6:33

startup holders who thought that they'd

6:35

gone from putting their money in a bank

6:37

that had served the industry for so long and was

6:39

trusted by the smartest people in the game.

6:42

To potentially having it all go up and smoke along

6:44

with the companies that poured thousands

6:46

of hours and and that kind of life's

6:49

dream into.

6:50

Okay. But fortunately, all these starter

6:52

holders who did place their money

6:54

in SVB

6:56

didn't actually end up losing it. Did

6:58

they? Yeah. That's right. Because there was real

7:00

risk that if all of these companies just had

7:02

their own cash yanked away from them, they

7:04

wouldn't be able to make payroll for their

7:06

staff. That would mean huge numbers

7:08

of layoffs, potentially promising technology companies

7:11

just vanishing out of existence. And

7:13

regulators decided that they couldn't bear that

7:15

risk. And so they would make every deposit

7:17

holder whole, they could withdraw their

7:20

money on the Monday, and

7:22

that was intended to stop the risk of these

7:24

things spreading. They also did that to a second bank

7:27

called Signature Bank of New York,

7:29

which was also heavy into the technology

7:31

space that specifically the crypto ecosystem.

7:34

And that was a big problem with these banks was that

7:36

they had a very narrow base of customers. They

7:38

weren't like your average bank that has loans

7:41

to people, does home loans, automotive

7:43

loans, and credit cards. These banks

7:45

were really concentrated in just these pretty

7:47

narrow

7:48

sectors. And that pose a real problem

7:50

when interest rates started to rise. Okay.

7:52

So as you say, in the days following,

7:54

we saw other banks go down, Cigna bank,

7:57

which you mentioned and First Republic

7:59

Bank. And then global investment

8:01

bank Credit Suisse also reported

8:03

trouble with its balance sheet. Based

8:06

in Switzerland. So tell me about that

8:08

and why all these banks appear

8:10

to be struggling right now?

8:12

There's a whole bunch of issues going

8:15

on. Some of them are a little bit distinct

8:18

for each bank. But the broad

8:20

problem is that the economy has swung

8:22

from one in which they're the good

8:24

times to one of rising interest rates.

8:27

And that's meant that like lions

8:29

hunting down a pack of antelope's, the ones

8:31

that awake getting exposed first.

8:33

So we had the issues with Silicon Valley

8:35

Bank where they had a very narrow set of customers.

8:38

We had issues with Signature Bank

8:40

where it was too heavy into crypto. We've

8:42

had issues with first Republic

8:44

Bank where it banks to very high net worth individuals.

8:47

And so, again, a very concentrated base

8:49

of customers, and that's required other major

8:51

US banks to tip money into it, to try

8:53

and convince the market that it's still solid.

8:56

And then there's Credit Suisse, which is on a

8:58

whole other order of magnitude of importance

9:00

to the global financial institution. And

9:03

if for someone who hasn't been paying much attention,

9:05

The name credit Swiss speaks a kind of

9:08

Swiss professionalism, discretion,

9:11

and a long history of doing

9:13

business. But actually, Over

9:15

the last decade or so, it has had a pretty

9:17

staggering number of major stumbles. It's

9:20

been exposed to a failed hedge fund in which

9:22

was called Akigraf's capital that

9:24

lost an enormous amount of money. It was exposed

9:27

to the controversial, financier, greenfield

9:29

capital that lost it a lot of money.

9:31

It's got exposure to the Gupta empire,

9:34

and on on and on issues of

9:36

disclosing customer data issues coming out of

9:38

the global financial crisis. Is

9:40

share price is down about ninety percent

9:42

over the last decade. And so

9:44

now, this this tired wave of money

9:46

that regulators are pumping into these banks

9:48

to try and reassure everyone that things are fine,

9:51

seems to be working for now.

9:53

And a lot of their share prices have recovered, but

9:55

the risk still looms because once

9:57

fear starts

9:58

spreading, it can be contagious. So

10:01

financial institutions right around the

10:03

world are clearly struggling right now.

10:05

How are Australian bank

10:07

scoping? You know, what's the chance of this

10:09

contagion, at least on a psychological level,

10:11

happening here? Well, regulators

10:14

and politicians from the treasury, Jim Chalmers

10:16

Dow, have done everything that they

10:19

can to convince the market

10:21

of the soundness of Australia's banks.

10:23

And I think, in large measure, they're

10:25

right, that our banks are different.

10:28

There's a few reasons for that. One is

10:30

that our banks are better and more

10:32

stringently regulated. And in some ways,

10:34

we've got the Hain banking

10:36

role commission to thank for that and also

10:39

just a long duration of

10:41

more solid regulation. And just one example

10:43

of that is that in the United States, if you're

10:45

setting up a kind of mid sized bank, you

10:48

can actually kind of choose who

10:50

you want to regulate you, which is a weird

10:52

thing. Right? If I live in New South Wales,

10:54

the New South Wales police, are going to be the people

10:57

who police me if I do a crime and and the same

10:59

actually goes for banking. You don't really have a choice

11:01

in Australia. But in the United States,

11:03

depending on the jurisdiction that you set up in

11:05

and how you arrange your bank, you can more or

11:07

less pick who you want regulate you. And that

11:09

creates an incentive for states try and compete

11:11

to have very business friendly regulation, which

11:14

has its pluses and the good times, but

11:16

in the lean times, can

11:18

create risks where there's not sufficient regulation

11:21

to protect customers and you end up with

11:23

these kind of emergency

11:24

bailouts. So, Nick, it sounds like

11:26

our banks aren't in the same kind of

11:28

strife that the banks in the US are, thanks

11:30

to our more stringent regulations. But

11:33

does this saga tell us anything about

11:35

the economy in a

11:36

Australia, more broadly speaking. Well,

11:39

for the startup sector, they've taken a real

11:41

blow because here was a bank

11:43

that would ease their entry into one of the largest

11:45

markets in the world. And whilst

11:47

regulators over in the US are trying to sell it to

11:49

try and recoup some of the money they've had to put

11:51

into these

11:52

depositors. There's no guarantee it's gonna

11:54

continue as a going concern. And if it

11:56

does, it might not be as friendly to small

11:58

start ups.

12:02

And that means that the expansion

12:04

parts of these companies, which could be the next

12:07

Canvas, massive graphic design platform,

12:09

or Atlassian, has been made

12:11

substantially harder. Now Canvas for one

12:13

has said that if SVB is revived,

12:16

they will go back into it. They will back that

12:18

bank once again. But It's

12:21

a big question mark hanging over industry that's

12:23

already been battered hugely by job

12:25

losses by the tens of thousands. And

12:28

then for the broader economy, There's

12:30

a real fear about whether we're heading into

12:32

a kind of global financial crisis style

12:35

situation. Once again, I was having a conversation

12:37

with Jessica Irvine, one of my

12:39

colleagues here at the Herald and a

12:41

senior financial writer. And

12:44

I was asking her this question, And she

12:46

pointed out having covered the GFC that

12:48

no one really knew they were in it until about

12:50

a year in, you know, Lehman Brothers, the bank that

12:52

failed, took about a year of that crisis

12:55

before it collapsed. And so it's very hard

12:57

to discern exactly where we're at in the

12:59

economic

13:00

cycle, but it's pretty clear that things

13:02

aren't

13:02

good. Well,

13:05

thank you very much for your time, Telinek. Thanks.

13:07

I'm sorry to end on such a down note.

13:19

Today's episode of Please explain was

13:21

produced by Hannamil's Turbot, Our

13:23

executive producer is Ruby Schwartz.

13:26

Please explain is the production of the age

13:28

in the Sydney Morning Herald. If you enjoy

13:31

the show and want more of our journalism,

13:33

subscribe to our newspapers today. It's

13:36

the best way to support what we do.

13:38

Search the age or dot com

13:40

dot au forward slash subscribe.

13:43

I'm Julia Karketzel. This

13:45

is please explain. Thanks for listening.