I don't quite understand it all, but it sounds very on point - Hidden forces podcast on this.

https://open.spotify.com/episode/6aFAf9E5CSAflkktXxGD7n?si=9e8384cd1a454cce

Forget about bank runs and bail outs. Even in "normal" times Aussie banks have been a crappy long term investment. Here they are over the last 10 years:

Dividends would certainly sooth some of the pain, but not much. Shareholder in Westpac would have averaged around 2% total return each year over the last decade if they reinvested all dividends. It was 4%pa for ANZ.

CBA would have been the best bet, but total average annual return with divs reinvested still only got you about 8.5% per annum.

And even as the best performing bank, CBA's dividend growth was fairly anaemic -- even prior to covid.

So why are they seen as such great investments? Well, the previous 10-15 years was a great time to be a bank shareholder -- investors did exceptionally well in the wake of deregulation and a structural decline in interest rates and rising household income (in part due to the rise of the 2 income family). Oh, and massive gains in property.

But trees do not grow to the sky.

I made some notes on CBA after the FY22 results (which I may have posted previously), which shows just how leveraged even a tier one institution like CBA is.

So CBA has $860b in deposits.

Some are term deposits, but about half are what you call “on demand” and short term deposits – savings accounts and the like.  About $440b worth. If you add in offset accounts, that rises to $570b

Now, the thing is, the CBA only has $160b of cash or cash equivalent, on hand. So it’s not possible for everyone to take their money out. If everyone drained their savings and offset accounts, only 1/4 of people would be made whole. Less than 1 in 5 people if you include things like term deposits.

Anyway – that’s fractional reserve lending. And that’s really how most money is created. Literally out of thin air when a bank adds an entry to their ledger.

It kind of all works because no one takes all their money out at once. And if someone does take their money out, when they spend it or give it to someone else, that person then deposits it in the bank. And when you average it out all across the system, there’s not really any issue – especially if you have a central bank to help cover any shortfall.

And there are certain reserve requirements set by APRA – you can't lend it all out. But you can lend out about $10 for every $1 you actually have. 

The important thing to note is that banks can be pretty leveraged institutions. It doesn't take much to go wrong before they get in trouble.

Between 2007 and 2010, the CBA increased its share count by almost 20%, dividends were cut by 15%  – and we didn't even have a recession here. 

As it currently stands, if 10% of their loans went bad – all else being equal – they would have no equity – they’d have more liabilities than assets.

Anyway, when you look at the assets of CBA as of FY22  – the majority of their assets are represented by loans they have made to households and businesses. About $880b in loans. And a full 70% of this relates to home loans. 28% of Australian home loans are for investment properties.

All the other stuff, personal loans, business loans – it’s less than a third of what they do. For better or worse, the fate of our major banks is very much tied to residential property.

Anyway, I'm not saying the local banks are necessarily in trouble. But I just wanted to point out how ordinary they have been as investments over the last decade, and how relatively small losses can magnify very quickly to much bigger issues.

As @Rick suggests, there's certainly good potential if you think these banks can return to better return on equity levels. But if they can't the returns will be ordinary, and maybe terrible if there's any issues.

Morningstar has a (number of) article(s) covering SVB this morning

The Australian ETFs and funds with SVB exposure

ASX companies deposited in Silicon Valley Bank will be able to access their money in full as regulators step in, but funds and ETFs invested in the collapsed bank have been given no such relief

I'm not sure if this article is only behind the Morningstar Premium paywall or not so ...

The collapse of US-based Silicon Valley Bank has sent investors around the world scrambling to assess their exposure to the bank, which was shuttered by US regulators over the weekend.

Silicon Valley Bank was a major lender to early-stage startup technology and healthcare companies, with assets of US$209 billion and US$175.4 billion in deposits.

Concerns surrounding ASX-listed tech companies which banked with SVB eased on Monday following a guarantee from the US federal government department to honour the bank’s depositors, meaning they’ll have full access to their deposits from Monday US time.

But no such guarantee has been made for shareholders and some unsecured creditors.

Using Morningstar Direct data, we identified which Australian ETFs and managed funds have the most exposure to SVB.

What’s happened

The largest US bank to shutter since the 2008 financial crisis, SVB fell into hot water late last week when the tech-focused lender lost $1.8 billion in the sale of US treasuries and mortgage-backed securities, owing to rising interest rates.

In an attempt to shore up liquidity, the bank then decided to raise more capital by selling $1.25 billion of its common stock to investors. On March 9, the company’s stock plunged 60% and the following day the US Federal Deposit Insurance Corporation took control of SVB’s assets.

Eric Compton, equity strategist at Morningstar, says aside from crypto-related meltdowns, this is one of the first banks he’s seen that has really suffered a liquidity crunch, which has forced it to restructure the balance sheet and realize losses on its securities portfolios.

“This has been a key risk lurking beneath the surface for the banking industry, as a number of banks currently have unrealized losses on their securities portfolios, driven by the rising-rate environment. In short, banks bought a number of mortgage-backed securities and Treasuries before interest rates started to rise. As interest rates have risen, the prices of these securities have gone down,” Compton says.

The SVB collapse has rippled through the US banking sector, with New York-based Signature Bank – a big lender to the crypto industry – also shut down by regulators, who cited ‘similar systemic risk’.

Shortly after Signature Bank fell, the US Treasury Department, Federal Reserve and FDIC stepped in and guaranteed all US Silicon Valley Bank and Signature Bank depositors would be honored in full.

Shareholders take a hit, but Australian investors have limited exposure 

While the guarantee from the US government—aimed at preventing a run on other banks—calmed concerns around ASX-listed SVB depositors, Australian shareholders invested in the SVB’s Financial Group arm remain exposed to losses.

Morningstar Direct data lists just over 50 Australian managed funds with exposure to SVB, although overall, the exposure is small with no funds holding more than 3% in the bank’s stock.

Because traditional, open-end managed funds report their holdings with a lag, some funds that are shown as owning the stock could have sold before the weekend.

Topping the list is the Mirova Global Sustainable Equity fund, which had a portfolio weighting of 2.67% in SVB Financial Group as of January 31, 2023.

Franklin Global Growth and Franklin Global Growth (Hedged) funds held 2.16% of SVB Financial Group equity as of 31 December. Both funds are aimed at outperforming the MSCI World ex Australia Index.

Morningstar director of manager research Michael Malseed says SVB was classed as a medium to smaller cap in global equities, meaning it doesn’t present any major index weighting risk.

“The passive fund exposure is only about 3 basis points, but some of the smaller-to-medium cap leaning funds—like those Franklin Templeton funds which have small-to-medium-cap bias—have a greater exposure,” he says.

It is also worth noting that disclosure laws in Australia—which do not mandate funds to disclose their full holdings to the public—mean the full extent of SVB holdings is not publicly available.

The Australian ETFs with SVB exposure

Just 11 Australian ETFs have exposure to SVB Financial Group, and of those, only two have a portfolio weighting of more than 10 basis points - both of which are operated by BetaShares.

As of 28 February, 2023, BetaShares Global Banks ETF (Currency Hedged) – which tracks the performance of the largest global banks outside of Australia - had a portfolio weighting of approximately 58 basis points in SVB Financial Group.

For context, that’s approximately $360,000 exposure in a $59 million ETF.

BetaShares S&P 500 Equal Weight ETF had an exposure of approximately 25 basis points.

Fed guarantee soothes ASX stock stress

The move by US regulators to guarantee depositors in full alleviated the exposure of Australian companies that held cash with the bank, including ASX-listed tech companies like Nitro Software (NTO) which had a little over $12 million in an SVB account when it was shuttered.

On Monday morning before the guarantee was announced, ASX tech stocks fell rapidly, and a flurry of tech companies began revealing banking relationships with SVB.

Alongside Nitro Software, other ASX-listed companies which disclosed cash or cash equivalents held in US or UK SVB accounts included:

• Sezzle (SZL): US$1.2 million in total cash and cash equivalents
• Xero (XRO): US$5 million from local transactional banking relationships with SVB
• Life 360 (360): Approximately $6.1 million in deposits with SVB
• SiteMinder (SDR): Cash holdings of up to $10 million with SVB.
• ikeGPS (IKE): Approximately US$3.2 million
• Dubber (DUB): Approximately A$1.3 million
• Tiny Beans (TNY): Approximately US$1.3 million via a U.S. based entity
• Dug Technology (DUG): US$1.6 million of deposits held with SVB and a further US$0.9 million of cash in transit from SVB UK accounts to the company’s Australian transactional accounts