Silicon Valley Bank Collapse: Takeaways for EM Banks

The dust has not fully settled on the Silicon Valley Bank saga, and there is a lot of finger-pointing at management, sell-side analysts, and regulators. The swiftness of the collapse is what seems to be the most troubling. What takeaways are there for EM banks? When analyzing banks, analysts and investors typically look for banks to have a larger percentage of their deposits in casa (current and savings account) deposits, which are cheaper sources of funds with little or no interest paid on balances. The higher the percentage, the lower the cost of funds and the higher the Net Interest Margin. But now we see the ugly downside of this; these deposits can flee a bank very quickly. Digitization has also played a part; moving deposits out of a casa or sight deposit account is as easy as point and click. Another takeaway has to do with diversification. Discussions with management are often about the diversification of their loan books, to assess industry concentration and single party risk. There is rarely a conversation about diversification of the liability side of the balance sheet or deposits. If there is a high industry correlation in deposits, this type of run on a bank could happen, as evidenced by the SVB narrative to date. So far, EM banks are weathering the SVB storm, with MSCI EM financials down -2.6% since March 8th, compared to a fall of -13.5% for the S&P 500 Banks index. As most banks in EM are diversified across industries and digitalization and on-line banking has been slower to develop, a lightning-strike bank run of the sort that took down SVB is less likely.