1 00:00:04,019 --> 00:00:07,050 Sean Aylmer: Welcome to the Fear and Greed Daily Interview, I'm Sean Aylmer. The 2 00:00:07,050 --> 00:00:10,260 Sean Aylmer: last few days have been quite extraordinary for global banking. 3 00:00:10,619 --> 00:00:13,049 Sean Aylmer: The headline, of course, has been the collapse of Silicon 4 00:00:13,050 --> 00:00:16,950 Sean Aylmer: Valley Bank in the United States, this country's second- biggest 5 00:00:16,950 --> 00:00:20,730 Sean Aylmer: bank failure ever. But the flow- on effects are significant, 6 00:00:20,790 --> 00:00:23,490 Sean Aylmer: with the impact felt on markets right around the world. 7 00:00:23,760 --> 00:00:26,160 Sean Aylmer: Peter Deans is a former bank chief risk officer and 8 00:00:26,160 --> 00:00:30,240 Sean Aylmer: founder of Notwithoutrisk Consulting. We've spoken to Peter before about 9 00:00:30,240 --> 00:00:33,150 Sean Aylmer: banking and about governance. It's an area he knows very, 10 00:00:33,150 --> 00:00:35,160 Sean Aylmer: very well. Peter, welcome back to Fear and Greed. 11 00:00:35,700 --> 00:00:37,200 Peter Deans: Hi Sean, great to be back here again. 12 00:00:37,860 --> 00:00:41,940 Sean Aylmer: In English, take me through what happened to Silicon Valley Bank. 13 00:00:42,510 --> 00:00:45,330 Peter Deans: Well, it's amazing, isn't it? The famous saying is 'A 14 00:00:45,330 --> 00:00:47,970 Peter Deans: week's a long time in politics', I think a weekend 15 00:00:47,970 --> 00:00:49,290 Peter Deans: is a long time in banking. 16 00:00:49,470 --> 00:00:49,860 Sean Aylmer: Yeah. 17 00:00:50,130 --> 00:00:51,870 Peter Deans: I was at a banking get- together a couple of 18 00:00:51,870 --> 00:00:54,360 Peter Deans: weeks ago, and a run on a US bank was 19 00:00:54,360 --> 00:00:56,550 Peter Deans: not one of the black swan events that was talked about. 20 00:00:57,060 --> 00:01:00,690 Peter Deans: So what's actually happened, and this has been looming a 21 00:01:00,690 --> 00:01:02,970 Peter Deans: little bit for those that are a bit closer to 22 00:01:03,510 --> 00:01:07,199 Peter Deans: the pointy end of the regional banking sector in the US, 23 00:01:07,260 --> 00:01:11,490 Peter Deans: and there'd been a couple of cryptocurrency- focused banks, one 24 00:01:11,490 --> 00:01:14,370 Peter Deans: called Silvergate Capital, that had had the wobbles for a 25 00:01:14,370 --> 00:01:16,890 Peter Deans: few weeks now, and it was probably more to do 26 00:01:16,890 --> 00:01:21,990 Peter Deans: with cryptocurrency and the fallout from FTX, which is probably about 27 00:01:21,990 --> 00:01:25,500 Peter Deans: eight months ago now. And then Silicon Valley Bank, which, 28 00:01:25,530 --> 00:01:28,110 Peter Deans: I think, as everyone knows now, 16th largest, was the 29 00:01:28,110 --> 00:01:31,590 Peter Deans: 16th largest bank in the US, with about $ 200 billion 30 00:01:31,590 --> 00:01:34,619 Peter Deans: US in deposits, came out on Wednesday and just said 31 00:01:34,620 --> 00:01:38,309 Peter Deans: that it had actually reported some losses on its asset portfolio 32 00:01:38,310 --> 00:01:43,050 Peter Deans: of US treasuries of about $ 1. 8 billion. And markets, 33 00:01:43,110 --> 00:01:46,229 Peter Deans: be it debt markets or equity markets, they never like 34 00:01:46,230 --> 00:01:49,860 Peter Deans: any bad news. And this crystallised, I think, in a 35 00:01:49,860 --> 00:01:55,980 Peter Deans: lot of investors, analysts and deposit holders' minds, concerns around 36 00:01:56,250 --> 00:02:00,690 Peter Deans: the financial viability of Silicon Valley Bank. That then moved 37 00:02:00,690 --> 00:02:02,310 Peter Deans: on to a little bit of a run on the 38 00:02:02,310 --> 00:02:05,220 Peter Deans: bank starting on Thursday. And then it was really a 39 00:02:05,220 --> 00:02:08,040 Peter Deans: gallop by Friday. And I think the figure that's been 40 00:02:08,040 --> 00:02:12,149 Peter Deans: quoted was that within 24 hours it had $ 42 billion 41 00:02:12,150 --> 00:02:16,020 Peter Deans: US in deposits withdrawn. And you go back a few 42 00:02:16,020 --> 00:02:19,500 Peter Deans: decades ago, you would've had to physically queue, queue round 43 00:02:19,500 --> 00:02:22,230 Peter Deans: the corner, take your wheelbarrow, but now it can be 44 00:02:22,230 --> 00:02:24,450 Peter Deans: done at the click of a mouse. And so that 45 00:02:24,450 --> 00:02:27,600 Peter Deans: really was the catalyst for a classic bank run or 46 00:02:27,720 --> 00:02:29,190 Peter Deans: albeit a digital bank run. 47 00:02:30,090 --> 00:02:33,389 Sean Aylmer: Just without getting too technical on it, so it seems the two 48 00:02:33,389 --> 00:02:37,889 Sean Aylmer: main reasons why Silicon Valley Bank failed, the first, it's 49 00:02:37,889 --> 00:02:41,639 Sean Aylmer: easy enough to understand, it primarily lent to a niche 50 00:02:41,639 --> 00:02:45,000 Sean Aylmer: section of the market, the tech sector, venture capitalists getting 51 00:02:45,000 --> 00:02:47,550 Sean Aylmer: into the tech sector. So it didn't spread its risk, 52 00:02:47,550 --> 00:02:50,669 Sean Aylmer: I get that part. When we talk about matching assets 53 00:02:50,669 --> 00:02:56,040 Sean Aylmer: and liabilities though, that's all about not managing your balance 54 00:02:56,040 --> 00:02:59,340 Sean Aylmer: sheet so that when money falls due, you've got enough 55 00:02:59,340 --> 00:03:00,780 Sean Aylmer: money there. Is that right? 56 00:03:01,919 --> 00:03:03,990 Peter Deans: Oh, you asked me not to be too technical here, 57 00:03:03,990 --> 00:03:06,570 Peter Deans: but it's a bit difficult. It comes to managing asset 58 00:03:06,570 --> 00:03:09,960 Peter Deans: and liabilities at banks, and I've been involved in asset and 59 00:03:09,960 --> 00:03:14,220 Peter Deans: liability committees at a number of Australian banks. And you 60 00:03:14,220 --> 00:03:16,830 Peter Deans: do have to stay very focused on the asset side, 61 00:03:16,830 --> 00:03:19,560 Peter Deans: which is where you invest or lent the money, and then 62 00:03:19,710 --> 00:03:23,760 Peter Deans: the liability side, which is where you take deposits effectively, 63 00:03:23,760 --> 00:03:28,440 Peter Deans: or you might raise wholesale funds through capital markets, bonds, 64 00:03:28,440 --> 00:03:31,139 Peter Deans: bond issuance and so on. I mean, interestingly, in the 65 00:03:31,139 --> 00:03:33,900 Peter Deans: case of Silicon Valley, they didn't actually have the lending 66 00:03:33,900 --> 00:03:37,050 Peter Deans: problem, which is usually what brings many banks down. They 67 00:03:37,080 --> 00:03:39,810 Peter Deans: were significantly cashed up. And this is part of the 68 00:03:39,810 --> 00:03:42,840 Peter Deans: problem that I think has caused the collapse here is 69 00:03:42,840 --> 00:03:46,500 Peter Deans: that as at the end of 2022, they had just over $ 70 00:03:46,530 --> 00:03:49,530 Peter Deans: 200 billion in assets, which is both sides of the 71 00:03:49,530 --> 00:03:53,100 Peter Deans: balance sheet. But on the asset side, it was fundamentally 72 00:03:53,490 --> 00:03:57,240 Peter Deans: cash and investments, and the investments being US government bonds, 73 00:03:57,810 --> 00:04:00,390 Peter Deans: which, with the rising interest rate environment, had meant they're 74 00:04:00,390 --> 00:04:03,930 Peter Deans: actually worth less. And on the deposit side, it was 75 00:04:03,930 --> 00:04:08,130 Peter Deans: the cashed up deposits from the venture capital community, the 76 00:04:08,130 --> 00:04:11,910 Peter Deans: startup community that had raised funds, and tech companies, and 77 00:04:11,910 --> 00:04:14,820 Peter Deans: obviously the bank's been in operation for about 40 odd 78 00:04:14,820 --> 00:04:18,419 Peter Deans: years down in San Jose, and they've obviously built a 79 00:04:18,420 --> 00:04:22,349 Peter Deans: clientele in that broader ecosystem. And so they didn't have, 80 00:04:22,350 --> 00:04:24,270 Peter Deans: as I said, the usual problems of, usually it's a 81 00:04:24,420 --> 00:04:27,870 Peter Deans: deterioration in the assets or the portfolio that causes this, 82 00:04:27,870 --> 00:04:30,600 Peter Deans: but in this case, it was actually the fact that 83 00:04:30,750 --> 00:04:34,410 Peter Deans: they were so cashed up and invested in US government 84 00:04:34,710 --> 00:04:37,920 Peter Deans: bonds, and those bonds were declining in value as the 85 00:04:37,920 --> 00:04:43,169 Peter Deans: Fed was increasing rates. And again, interestingly, I wouldn't say 86 00:04:43,170 --> 00:04:46,770 Peter Deans: 99%, but pretty well all the banks around the world 87 00:04:47,040 --> 00:04:49,859 Peter Deans: will make sure they hedge that interest rate risk to 88 00:04:49,860 --> 00:04:52,710 Peter Deans: make sure they don't have this problem that Silicon Valley Bank had, 89 00:04:52,710 --> 00:04:56,580 Peter Deans: which is to announce losses on its bond portfolio, which 90 00:04:56,580 --> 00:04:58,980 Peter Deans: if it had continued all the equity that they had would've 91 00:04:58,980 --> 00:05:01,710 Peter Deans: would've been pretty quickly wiped out. And I think that's, well, why 92 00:05:01,710 --> 00:05:03,630 Peter Deans: we've ended up with where we are now. 93 00:05:04,350 --> 00:05:06,300 Sean Aylmer: Stay with me, Peter, we'll be back in a minute. 94 00:05:06,300 --> 00:05:15,960 Sean Aylmer: My guest this morning is Peter Deans, former bank chief risk 95 00:05:15,960 --> 00:05:20,250 Sean Aylmer: officer and founder of Notwithoutrisk Consulting. It seems a long 96 00:05:20,250 --> 00:05:23,910 Sean Aylmer: way away from Australia what happened at Silicon Valley Bank, 97 00:05:23,970 --> 00:05:28,290 Sean Aylmer: yet bond yields have fallen. So there's been a rally 98 00:05:28,290 --> 00:05:31,500 Sean Aylmer: in bond prices, people are now talking about the Reserve 99 00:05:31,500 --> 00:05:33,930 Sean Aylmer: Bank not lifting interest rates by as much as we 100 00:05:33,930 --> 00:05:37,739 Sean Aylmer: thought, same deal with the US Federal Reserve. How's all 101 00:05:37,740 --> 00:05:42,029 Sean Aylmer: that transferred to be so impactful on Australia? 102 00:05:42,660 --> 00:05:45,240 Peter Deans: Yeah, look, I think the compare and the contrast is 103 00:05:45,240 --> 00:05:48,779 Peter Deans: actually quite an interesting one between US and Australia. I mean, Australia, 104 00:05:49,110 --> 00:05:52,950 Peter Deans: there is quite sound regulation and supervision of all banks, 105 00:05:53,130 --> 00:05:55,380 Peter Deans: not just the large banks. I think there's a bit 106 00:05:55,380 --> 00:05:58,589 Peter Deans: of a difference here that I don't think you'd really 107 00:05:58,589 --> 00:06:01,770 Peter Deans: see a run on a bank like this because banks 108 00:06:01,770 --> 00:06:05,969 Peter Deans: here are fundamentally well managed, and they've got asset liability 109 00:06:05,970 --> 00:06:09,239 Peter Deans: committees that focus very much on this particular issue that 110 00:06:09,240 --> 00:06:13,920 Peter Deans: Silicon Valley Bank has encountered. I think the contagion question, 111 00:06:13,920 --> 00:06:17,219 Peter Deans: and there's been quite a bit today around the market 112 00:06:17,220 --> 00:06:19,349 Peter Deans: and in the press around the fact there are some 113 00:06:19,350 --> 00:06:22,020 Peter Deans: startups in Australia that are affected, but on the whole, 114 00:06:22,410 --> 00:06:24,450 Peter Deans: Silicon Valley Bank is a long way away from here. 115 00:06:24,450 --> 00:06:27,000 Peter Deans: And the startups in Australia, I'm sure most of them 116 00:06:27,000 --> 00:06:30,060 Peter Deans: put their money in the Australian banking system, which is 117 00:06:30,060 --> 00:06:33,810 Peter Deans: a good thing. I think the contagion issues probably fall 118 00:06:33,839 --> 00:06:38,640 Peter Deans: more down to this unwinding of quantitative easing. And if you 119 00:06:38,640 --> 00:06:41,430 Peter Deans: look at what's happened over the last 12 months, you've 120 00:06:41,430 --> 00:06:44,729 Peter Deans: seen a collapse in listed tech stocks in the US 121 00:06:44,730 --> 00:06:49,650 Peter Deans: and around the world, you've seen collapses of many cryptocurrency- 122 00:06:49,680 --> 00:06:55,860 Peter Deans: related companies and exchanges, you've seen venture capital funding dry up, 123 00:06:56,310 --> 00:07:00,750 Peter Deans: but interestingly, it's been more the investments, the willingness to 124 00:07:00,750 --> 00:07:04,200 Peter Deans: invest by the venture capital firms that stopped. I was 125 00:07:04,200 --> 00:07:06,900 Peter Deans: just reading this morning, Bain Capital had put out a 126 00:07:06,900 --> 00:07:09,780 Peter Deans: note about a week ago saying they estimated that the 127 00:07:09,780 --> 00:07:14,070 Peter Deans: venture capital industry has got $ 586 billion in dry powder 128 00:07:14,070 --> 00:07:17,190 Peter Deans: ready to invest still, and last year they raised about $ 129 00:07:17,220 --> 00:07:21,870 Peter Deans: 162 billion in new investment funds. So the money's there, 130 00:07:22,110 --> 00:07:24,570 Peter Deans: it's just that I think the venture capital funds are 131 00:07:24,570 --> 00:07:27,390 Peter Deans: a little bit risk- averse, as many investors are in 132 00:07:27,390 --> 00:07:31,470 Peter Deans: these volatile times. But yeah, they certainly don't have Silicon 133 00:07:31,470 --> 00:07:34,500 Peter Deans: Valley Bank to put the $ 586 billion into any anymore 134 00:07:34,500 --> 00:07:40,530 Peter Deans: because it's disappeared. But I think there's this unwinding of QE, 135 00:07:40,680 --> 00:07:44,100 Peter Deans: the tightening higher interest rates, and I think also, I'm 136 00:07:44,100 --> 00:07:46,739 Peter Deans: not sure if you've covered it previously, but in the 137 00:07:46,740 --> 00:07:50,880 Peter Deans: US the Real Estate Investment Trust, or REITs, there's been a number 138 00:07:50,880 --> 00:07:54,480 Peter Deans: of the very large REITs that have suspended redemptions because 139 00:07:54,870 --> 00:07:59,100 Peter Deans: as interest rates have being going up, commercial property values 140 00:07:59,100 --> 00:08:02,550 Peter Deans: have been going down. And some of the small savvy investors 141 00:08:02,550 --> 00:08:04,440 Peter Deans: have said, " Well, I'm not going to wait til the 142 00:08:04,440 --> 00:08:06,630 Peter Deans: losses have crystallised on the sale of a property, I'm 143 00:08:06,630 --> 00:08:10,560 Peter Deans: going to actually access a buyback facility." And so there's been, again, 144 00:08:10,560 --> 00:08:12,120 Peter Deans: a little bit of a rush for the door in 145 00:08:12,120 --> 00:08:15,090 Peter Deans: the REIT sector, and it's just the fallout from this 146 00:08:15,090 --> 00:08:19,110 Peter Deans: higher interest rate environment and the unwinding of which I 147 00:08:19,110 --> 00:08:22,020 Peter Deans: used to say was cheap money, but basically free money 148 00:08:22,020 --> 00:08:24,660 Peter Deans: for many, many years in Europe and the US where 149 00:08:25,140 --> 00:08:27,840 Peter Deans: the cost of debt was negligible. 150 00:08:28,530 --> 00:08:31,230 Sean Aylmer: Perhaps we shouldn't be so surprised then that we're getting 151 00:08:31,230 --> 00:08:34,380 Sean Aylmer: things like Silicon Valley Bank, given what you just said. 152 00:08:35,100 --> 00:08:37,230 Peter Deans: Oh, look, I think, and look, there'll be a lot 153 00:08:37,230 --> 00:08:40,439 Peter Deans: of stewards inquiries into what's actually happened with Silicon Valley 154 00:08:40,440 --> 00:08:43,260 Peter Deans: Bank because if you look at just some of the 155 00:08:43,260 --> 00:08:48,120 Peter Deans: facts of the bank itself, it was about $ 70 billion 156 00:08:48,420 --> 00:08:53,189 Peter Deans: in assets three years ago, $ 115 billion 2 years ago, 157 00:08:53,190 --> 00:08:58,559 Peter Deans: and $ 210 or $ 215 million when it collapsed. I mean, a 158 00:08:58,559 --> 00:09:02,220 Peter Deans: bank to double in two years is almost unheard of. 159 00:09:02,309 --> 00:09:05,850 Peter Deans: And if you sit on the regulatory side, so the 160 00:09:05,850 --> 00:09:09,000 Peter Deans: likes of APRA, the equivalent in the US, which is the 161 00:09:09,120 --> 00:09:13,920 Peter Deans: OCC, and all the central bank regulators around the world, 162 00:09:14,190 --> 00:09:16,949 Peter Deans: I mean, they look very closely at banks that grow 163 00:09:16,950 --> 00:09:20,250 Peter Deans: too quickly, and it's very much almost like a bit 164 00:09:20,250 --> 00:09:23,730 Peter Deans: of a warning sign, or you might get a speeding 165 00:09:23,730 --> 00:09:26,610 Peter Deans: ticket if you're a bank which is growing too quickly 166 00:09:26,610 --> 00:09:30,360 Peter Deans: because the regulators, they see the stats which are submitted 167 00:09:30,360 --> 00:09:32,760 Peter Deans: every month, they look very closely at where the growth 168 00:09:32,760 --> 00:09:35,730 Peter Deans: is. I think what's probably been an issue here for 169 00:09:35,730 --> 00:09:40,380 Peter Deans: regulators is that because Silicon Valley Bank hasn't fundamentally lent, 170 00:09:40,860 --> 00:09:43,319 Peter Deans: I think the regulators may have been lulled into a 171 00:09:43,320 --> 00:09:46,290 Peter Deans: false sense of security because they're not taking credit risk 172 00:09:46,290 --> 00:09:50,010 Peter Deans: on lending customers, be they retail consumers or business customers. 173 00:09:50,550 --> 00:09:53,880 Peter Deans: But I think the regulators, they'll certainly be having a 174 00:09:53,880 --> 00:09:56,640 Peter Deans: bit of a postmortem on, well, what actually happened here? 175 00:09:57,510 --> 00:10:00,750 Peter Deans: I think, and it's been reported a few times, Dodd- 176 00:10:00,750 --> 00:10:04,709 Peter Deans: Frank Act in 2008 was loosened under the previous Trump 177 00:10:04,710 --> 00:10:07,920 Peter Deans: administration, and I think there's probably a little bit of 178 00:10:07,920 --> 00:10:10,350 Peter Deans: that in the mix as well. But we might just 179 00:10:10,350 --> 00:10:13,709 Peter Deans: find Silicon Valley Bank is a bit of an aberration. 180 00:10:13,710 --> 00:10:16,679 Peter Deans: It's just an unusual beast that's arisen in this era 181 00:10:16,679 --> 00:10:20,730 Peter Deans: of an explosion in venture capital investment. I mean, I think that's 182 00:10:20,730 --> 00:10:24,840 Peter Deans: probably that coupled with the loose monetary policies, or perhaps 183 00:10:24,840 --> 00:10:27,270 Peter Deans: that's what drove it, I think it may have created 184 00:10:27,270 --> 00:10:29,730 Peter Deans: a bit of a one- off event. But having said 185 00:10:29,730 --> 00:10:33,300 Peter Deans: that, if the Treasury and the US Fed earlier this 186 00:10:33,300 --> 00:10:37,050 Peter Deans: morning hadn't put in place the backstop arrangements and guaranteed 187 00:10:37,050 --> 00:10:40,860 Peter Deans: the deposits of Silicon Valley Bank and others, then I 188 00:10:40,860 --> 00:10:43,800 Peter Deans: think would've probably seen a run on the smaller banks 189 00:10:43,800 --> 00:10:44,340 Peter Deans: in the US. 190 00:10:44,910 --> 00:10:46,709 Sean Aylmer: Peter, thank you for talking to Fear and Greed. 191 00:10:47,070 --> 00:10:48,090 Peter Deans: Great to be here. Thanks, Sean. 192 00:10:48,840 --> 00:10:52,110 Sean Aylmer: That was Peter Deans, former Chief Risk officer for a bunch of Australian 193 00:10:52,110 --> 00:10:55,830 Sean Aylmer: banks and founder of Notwithoutrisk Consulting. This is the Fear 194 00:10:55,830 --> 00:10:57,929 Sean Aylmer: and Greed Daily Interview. Join us every morning for the 195 00:10:57,929 --> 00:11:00,690 Sean Aylmer: full episode off Fear and Greed, Australia's most popular business 196 00:11:00,690 --> 00:11:03,119 Sean Aylmer: podcast. I'm Sean Aylmer, enjoy your day.