Silicon Valley Bank's Collapse: What It Means for Markets
Updated: Mar 16
Photo source: Bloomberg via Getty Images
Three banks failed in a week: Silvergate Bank, Silicon Valley Bank (SVB), and Signature Bank, with the latter two being taken over by the US government last week.
Silvergate Bank and Signature Bank were the two primary banks for cryptocurrency businesses, while Silicon Valley Bank is a major lender to startups. Silicon Valley Bank is the largest of these three banks. One of our fund partners, Evelyn Partners, the UK's leading integrated wealth management and professional services group, has shared this timely article below about Silicon Valley Bank.
What happened?
On Friday 10th March, Silicon Valley Bank (SVB) was taken over by the US Federal Deposit Insurance Corporation (FDIC), an independent agency which focuses on maintaining financial stability. This decision was taken amid growing concerns about the bank (the 16th largest in the US by assets) posing a systemic risk to the US and global financial system.
The problems at SVB came about because of the bank’s inadequate risk management practices. To earn a higher return, SVB invested customer deposits in long dated bonds, but as interest rates rose over the last 12 months, the value of these bonds fell. Crucially, SVB failed to hedge this risk, leaving the bank with a large unrealised loss.
As concerns mounted about SVB’s financial position, customers started to withdraw their money on Thursday 9th March. This was exacerbated because the bank had a concentrated deposit base - only 12% of accounts, which were largely held by companies, were covered by the FDIC insurance scheme.
SVB sold its most liquid bond holdings to meet deposit demands, causing the bank’s earnings to take a hit and the value of its capital on its balance sheet to fall. Some feared this could pose a systemic risk to the US and global financial sector. The collapse of SVB led investors to sell US bank stocks on Thursday, which spread to Europe on Friday.
On Sunday the Federal Reserve (the Fed) announced that it would provide additional funding to eligible banks to help them meet the demands of their depositors. This new ‘Bank Term Funding Program’ (BTFP) offers loans up to 1 year against pledged US treasuries and other assets, which will be valued at par. US Treasury Secretary Janet Yellen has approved actions to allow the FDIC to act in a manner that fully protects all depositors, whether they are insured or not. This means that depositors will continue to have access to their money, which reduces the risk of further bank runs.
Meanwhile, the UK arm of SVB was taken over by HSBC early Monday morning following all-night talks led by the Prime Minister Rishi Sunak and the Bank of England.
What does it mean?
The collapse of SVB presents a risk to the start-up sector in both the UK and US, given that’s where its core focus was. Some of this risk will be mitigated by the actions taken by regulators and the acquisition of the UK subsidiary by HSBC. Nonetheless, we still expect that investor sentiment towards these sectors will be hit in the near term.
But clearly, there continues to be sizeable risks in financial markets. Interest rates have moved a long way in a short space of time, exposing weaknesses across the global financial system (SVB and UK LDI crisis). It’s hard to know where the next crisis will emerge from, so investors will need to remain vigilant as the impact of higher interest rates feeds its way through the global economy.
Bottom line
At this stage, we do not believe this is likely to be a repeat of the Global Financial Crisis (GFC). SVB collapsed as a result of a liquidity crisis with too many ‘large’ depositors wanting to take money out at the same time. The GFC was a solvency crisis caused by bad loans and poor investments.
The collapse of SVB is an idiosyncratic risk, not a systemic risk. It was driven by mismanagement of liquidity by the bank itself. The wider banking system has better diversification across their asset portfolios, and larger banks have regulatory obligation to hedge against changes in interest rates. Generally, banks have also built-up their capital reserves since the GFC to ensure they are better insulated against future crises.
The crisis has, however, shone a light on a new risk. The prevalence of online banking allows faster deposit withdrawals, which could be accelerated by speculation about bank solvency on social media. Going forward, regulators will need to consider what this means for financial stability.
The quick response from the Fed, FDIC and the Treasury Secretary should, in our view, be enough to reduce stress across the financial system, support financial stability and minimise the impact on businesses and the wider economy. The acquisition of SVB UK by HSBC should also help to draw line under this crisis in the UK.
We also think it’s likely the Federal Reserve will proceed more carefully with changes to monetary policy in the coming months. The FOMC will want to avoid moving too quickly as it assesses the fallout from the collapse of SVB.
Source: Refinitiv 13 March 2023
Again, we would like to thank Evelyn Partners for this informative article. You may visit their website for more articles like this at (https://www.evelyn.com/). This article is especially useful because such news could widely spread fear among the general public. The article sheds light on and emphasizes important facts about the event to avoid making rash decisions.
What we can take from this is that while the closures of these banks are certainly concerning, it's important to note that they are not indicative of a broader problem in the banking system. Banks are regulated by central banks and other government agencies, which are responsible for ensuring that they operate in a safe and sound manner. We at Astra will continue to monitor the latest developments on this matter. We will provide you with relevant market information and opportunities in collaboration with our fund partners. Should you have concerns about this or want to talk about it more please feel free to reach us.