Economy & Business
The collapse of SVB: Any lessons for Taiwan?
While Taiwan has very little exposure to the now bankrupt Silicon Valley Bank, its collapse should hold lessons for regulators and investors
By Paul Shelton
With global markets abuzz with the news of the collapse of Silicon Valley Bank (SVB) on Friday, 10 March, it would be easy to be alarmed and subscribe to at least some commentary that sees this as the start of a new global financial crisis.
Certainly, with SVB being taken over by US federal regulators it has the distinction of becoming the largest US bank to fail since the 2008 global financial crisis.
On Sunday, 12 March, the US federal regulators also grew concerned about the financial health of New York's Signature Bank, largely because of its big exposure to the volatile crypto market.
As a result, both banks are now under the control of the Federal Deposit Insurance Corporation (FDIC - a US government corporation that provides deposit insurance to depositors in American commercial banks and savings banks). The FDIC was created during the Great Depression of the 1930’s to restore trust in the American banking system.
Regulators announced the takeovers after what was effectively a run on SVB late last week when depositors rushed to withdraw tens of billions of dollars worth of deposits.
The collapse sent shockwaves across the financial industry with the shares of small and regional US lenders also taking a battering.
What was SVB?
SVB wasn’t a megabank of the likes of JPMorgan or Goldman Sachs, but it was a major player in the tech sector and competed successfully in that field with the bigger-name banks being the 16th largest US bank with billions of dollars in deposits.
What went wrong?
Quite simply, with the benefit of hindsight, bad investments. SVB had to invest the billions of dollars of deposits that it had on its books (deposited by a then flourishing US tech industry).
Traditional lending was a limited avenue for SVB, so SVB chose to invest billions of dollars into long-term US Treasury bonds (generally considered to be safe, modest, prudent investment) when US interest rates were at record lows in 2021.
But long-term bonds only pay out at maturity, and they lost value as the Fed began to raise interest rates in 2022 to fight inflation. SVB had to sell the bonds at a staggering US$1.8 billion loss, news of which caused panic among investors and depositors. This led to a sharp sell-off of the bank’s shares, causing them to lose half their market value, and a run by depositors. News of the bank’s woes then sent shock waves through the broader market, sending shares of banks and tech companies tumbling, exacerbating the situation for the already struggling US tech market. The perfect storm.
Normally, the FDIC only insures deposits up to US$250,000, but the US government now says that all deposits will be guaranteed whilst conversely stating there will be no “bail out” of SVB. US taxpayers will not find themselves footing the bill as occurred in the last financial crisis back in 2008. Instead, any losses to the deposit insurance fund would be recovered by a “special assessment on banks”.
SVB and concentration risk
What SVB’s collapse has also highlighted are bigger forces in motion in the US tech industry and mostly interestingly, the almost unique behavior of SVB’s customers, the venture capital firms, startups and wealthy tech sector individuals to use SVB exclusively as “their bank”, thereby creating their own form of what is known as concentration risk.
Impact on Taiwan?
Taiwan’s Minister of Economic Affairs, Wang Mei-hua has said the collapse of SVB will have little impact on Taiwan and, according to the Financial Services Commission, (FSC, Taiwan’s principal financial regulator) Taiwanese insurance and securities firms had no exposure to SVB. Taiwanese trust funds are said to have had some NT$300 million (approximately US$10 million) in exposure to SVB but this is not considered to be a substantial amount or issue and will not impact Taiwanese investors.
Could this happen in Taiwan?
At present, a collapse of a Taiwanese bank, in the manner of SVB would be unlikely. Taiwanese banks are highly regulated by the FSC (with an average of an in-house inspection every two years). Taiwan’s banks are, by nature, quite conservative. There are obvious geopolitical risks that affect Taiwan but not any one single Taiwanese bank.
Taiwan is certainly overbanked, with some 38 major banks in operation at present but there seems little appetite amongst the banks for mergers or acquisitions. Taiwanese banks seem more interested in creating payments systems (backed by credit cards) for their retail clients. Certainly, Taiwanese citizens seem to have multiple credit cards and multiple banks accounts but again, these facts do not suggest unmanageable risk for local banks.
Nevertheless, Taiwan’s banking system has had its own form of concentration risk issues. As far back as 2010 it was observed that credit risk concentration in property lending was affecting Taiwanese banks’ financial strength and was creating potential sources of volatility to asset quality, earnings, and capital. At that time, the high credit risk concentration at Taiwanese banks was attributed to the excess supply of credit and low interest rate environment. Further, Taiwan’s banks also had a greater focus on volume growth instead of maintenance of margins, the use of loans to cross-sell other products, a lack of sophisticated risk underwriting and management, and where they felt compelled by government directives to provide large-scale infrastructure project lending.
But times have changed and in early 2022, the FSC took precautionary moves to increase regulatory risk weights (RW) for new domestic property loans to assist in containing concentration and credit risks for the banking sector. RWs are used to determine the minimum amount of capital a bank must hold in relation to the risk profile of its lending activities and other assets. This is done in order to reduce the risk of insolvency and protect depositors. The more risk a bank has, the more capital it needs on hand.
The new RW increases of 50%-100%, from 20%-30%, for new housing loans to retail buyers with more than two properties, as well as to corporate buyers are expected to further curb speculative real-estate investment. The RW was also increased to 150%-200%, from 75%-150%, for new loans to finance land acquisition and housing inventories.
These measures are expected to moderate the pace of banks’ property lending and contain concentration risks and whilst smaller Taiwanese banks with high property concentration were more impacted by the changes, it was also expected that such banks would manage down their high-risk property exposures in line with FSC expectations. Observers felt that these increases in RW would see Taiwanese banks diversify their loan portfolios into non-property sectors such as business investment loans for industrial sectors.
So, provided that Taiwanese banks are following the directives (and there is no evidence that they would run the risk of regulatory sanction by disregarding same), we should see a decrease of concentration risk which is a positive outcome for Taiwan.
Taiwan’s Central Deposit Insurance Corporation
Like the US FDIC, Taiwan has its own Central Deposit Insurance Corporation (CDIC) created in 1985. The CDIC is the only institution in Taiwan exclusively in charge of managing the deposit insurance system and serves as an integral part of Taiwan’s financial safety net.
The policy goals and responsibilities of the CDIC include:
- Safeguarding the rights of depositors in financial institutions
- Maintaining an orderly credit system
- Enhancing the sound development of financial operations
- Handling deposit insurance
- Managing deposit insurance risk
- Dealing with failing and failed insured institutions.
The CDIC also maintains a Financial Early-Warning System (and a risk-based premium rating system). The early-warning system is a statistical model for Taiwan’s financial regulators to regularly assess the operational condition of all financial institutions that accept deposits, including banks, credit cooperatives, and the credit departments of farmers' and fishermen's associations.
In terms of deposit insurance, financial institutions duly approved to accept deposits are required to take part in deposit insurance provided by the CDIC and to pay premiums therefor. If an insured institution terminates its business or is unable to pay off its deposits, the CDIC compensates depositors by up to NT$3 million, including principal and interest (and if accounts are held at multiple banks the depositors are also entitled to the same compensation for those accounts). The system is designed to ensure the rights of depositors and maintain the stability of the financial system.
We are unlikely to see a Taiwanese bank collapse in the manner of SVB especially as no one bank serves only one industry or sector. There are regulatory guardrails in place, a vigilant regulator, and a generally more conservative environment. That said, there will be lessons to learn from the SVB collapse and it is certain that Taiwan will watch and learn.
Paul Shelton is a consultant with 30 years of experience in the international financial services and related industries with skills in all aspects of legal and financial crime compliance and regulatory relationship advisory and management.