Has the sudden collapse of Silicon Valley Bank ignited fears of a new financial crisis? Or is its demise incidental, offering investors an excuse to take profits on attractive gains that bank sector stocks booked in recent months?
As European financial markets closed on Friday, worried investment professionals were hard to find. The sentiment and rising interest rates however are clearly recognised as risk factors.
Aegon Asset Management head of fixed income Hendrik Tuch told clients that SVB’s collapse could be a sign of more “interest-rate accidents” to come.
“The market now hopes the Fed will ease its policy but a bankrupt little IT bank won't be enough to change the Fed's mind. Next week there will be strong CPI numbers and then likely another 50 basis point hike. 2023 is finally becoming exciting,” Tuch said.
Banking stocks were sold off after SVB announced billions in losses on its bond portfolio. Investors liquidated their positions in SVB, sending the stock price down more than 60% before it again plunged 60% on Friday before trading was suspended. Other US banking stocks also posted steep losses ahead of the weekend.
That move was reflected in Europe amid fears that the demise of yet-another US financial institution could trigger widespread ripple effects in financial markets, much like the collapse of Lehman Brothers did in 2008. Deutsche Bank lost more than 8%; Credit Suisse 4.5%; Commerzbank 4%; ING Groep 5.6%; BNP Paribas 5%.
Sentiment
“What makes the situation extra difficult for banks like SVB is that sentiment plays a big role in the banking sector,” said Luc Plouvier, senior portfolio manager of dividend strategy at Van Lanschot Kampen. “When people stop trusting it, they leave. That accelerates negative reactions in the market.”
Even with these losses, most European bank stocks still traded near their six-month highs. Plouvier said the SVB news also was used as an excuse to lock in profits in investment portfolios. Despite its 4.6 per cent drop on Friday, the Europe Stoxx 600 banks index was still up 18 per cent in the last six months. Since October, the iShares MSCI Europe Financials ETF has risen almost 20 per cent.
Interest rate risk
The SVB crisis poses a particular challenge for the venture capital and private equity community in Silicon Valley. During the era of negative interest rates, risk-hungry investors could finance start-up and VC investments with relative ease because money basically came for free. These days are over. VC firms have less room to manoeuvre now that interest rates are rising.
SVB, named as one of “America’s Best Banks” by Forbes magazine less than a week ago, is a major source of funding for VCs in Silicon Valley. In recent years, the bank was not able to turn surging deposits, many from Covid-19 stimulus packages, into loans for start-ups swiftly enough. Instead, it chose to invest them in US Treasuries. When interest rates started rising, that became problematic.
As a result, SVB was exposed to significant interest rate risk, forcing it to sell some 21 billion dollars in government bonds at a loss of 1.9 billion.
No domino effect expected
Simon Wiersma, chief strategist at ING, is not expecting a domino effect. “Today is no more exciting on our trading floor than any other day,” Wiersma said on Friday. “We have no positions in big banks with a lot of venture capital loans on their balance sheets.”
Also Allianz chief economist Mohammed El Erian argued that contagion risk can be easily contained. “While the US banking system as a whole is solid, and it is, that does not mean that every bank is,” El Erian said on LinkedIn.
“Due to the volatility in yields after the prior protracted period of leverage-enabling policy, the most vulnerable institutions currently are those vulnerable to both interest rate and credit risk. Contagion risk and, therefore, the systemic threat, can be easily contained by careful balance sheet management and avoiding more policy mistakes,” he said.
FDIC placed in charge
After trading in its shares was suspended on Friday and about 48 hours since the first signs of its problems emerged, Silicon Valley Bank became the first US bank to go into resolution since October 2020. The Federal Deposit Insurance Company, or FDIC, said it had been appointed as receiver by the state of California.
Deposit of SVB’s retail clients are insured up to 250,000 dollars. The FDIC said insured depositors will have full access to their insured deposits no later than Monday morning, 13 March 13. Uninsured depositors will receive an advance dividend within the next week.
As of December 31, 2022, Silicon Valley Bank had approximately 209 billion dollars in total assets and about 175.4 billion in total deposits. FDIC said on Friday that the amount of deposits in excess of the insurance limits will be determined once it obtains additional information from the bank and customers. According to its website,
SCB serves more than 9,500 clients, according to its website.
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