Will Silicon Valley Bank’s fall destabilize the larger financial system and trigger a fresh meltdown? This unsettling notion is scaring markets.
Wealthy hedge fund investor Bill Ackman has compared SVB to Bear Stearns, the first lender to fail at the beginning of the global financial crisis in 2007–2008.
The next, least well-capitalized bank confronts a run and fails, and the dominoes keep falling, according to Ackman, who posted the risk of failure and deposit losses on Twitter.
Yet, according to the majority of analysts, SVB’s collapse now seems to be company-specific. The bank, a significant lender to American technology firms, came under strain when Silicon Valley funding dried up due to the economic slowdown and the sharp increase in interest rates.
According to Jonas Goltermann, deputy chief markets economist at Capital Economics, “SVB is in difficulties because they are exposed to specific businesses. He continued that most other institutions are more “diversified.”
Following the abrupt collapse of SVB, Deputy Treasury Secretary Wally Adeyemo on Friday sought to reassure the public about the banking system’s stability.
In an exclusive interview with CNN, Adeyemo said, “Federal authorities are keeping an eye on this specific banking institution, and when we think about the broader financial system, we’re pretty confident in the ability and resilience.
The remarks follow Treasury Secretary Janet Yellen’s unexpected call for a meeting of banking regulators to investigate Silicon Valley Bank’s collapse, a significant lender to the struggling tech industry.
Adeyemo stated, “We have the instruments required to [handle] instances like what happened to Silicon Valley Bank.
Due to the extensive regulatory changes implemented in the wake of the 2008 financial crisis, there is also less concern about the soundness of the banking industry.
But, the collapse of SVB highlights the strains brought on by the fastest increase in borrowing costs in decades. To combat excessive inflation, central banks have raised interest rates, but the rapid pace of the rises has created unexpected issues. Concerns about additional unforeseen repercussions continue.
For instance, when borrowing costs have increased and bond values have fallen, banks who snatched up US Treasuries and other bonds while interest rates were shallow are now sitting on losses.
Rattling Bank Stocks
SVB, established in 1983, provided funding for over half of US venture-backed technology and healthcare businesses. This week, when it stated that it needed money badly, its issues were apparent. On Wednesday, the corporation disclosed intentions to raise more than $2 billion from investors to close a financial gap by selling a portion of its troubled bond portfolio.
Once customers withdrew their funds from the bank due to harsher times, SVB put the bonds up for sale. SVB stock fell 60% on Thursday. Trade in the stock was suspended on Friday amid rumors that the bank was looking for a buyer because it could not raise all the required money.
After their intervention, California’s regulators closed the bank and appointed the US Federal Deposit Insurance Corporation as the receiver. By the end of the previous year, Silicon Valley Bank had around $175 billion in total deposits and $209 billion in total assets.
Shares of other lenders have also been sliding, indicating that worries are spreading to other areas of the banking industry. Thursday saw declines of 4% to 7% for JPMorgan Chase (JPM), Bank of America (BAC), Wells Fargo (WFC), and Citigroup (C).
Smaller banks continued to struggle, even if their shares stabilized on Friday. The SPDR S&P Regional Banking ETF, an exchange-traded fund that tracks regional banks, was down more than 6%. European banks also took a hit.
What Will Happen Next?
Other lenders who serve incredibly niche markets can experience pressure. Silvergate, a lender focusing on cryptocurrencies, announced on Wednesday that it was ceasing operations after recent volatility in digital assets severely damaged its profitability.
Yet, it is believed that a broader epidemic’s dangers are minimal.
Professor of finance at King’s College London Jens Hagendorff remarked, “Generally, the banking system is in good shape and able to sustain severe shocks. “I believe SVB is unique in that their depositor base is erratic,” the author said.
Senior bank analyst Mike Mayo at Wells Fargo said the SVB crisis could be “an idiosyncratic situation.”
On Friday, he told CNN’s Julia Chatterley, “This is sea and day from the global financial catastrophe from 15 years ago. “Banks were taking unnecessary risks back then, and people felt everything was alright,” he remarked. Although everyone is worried, the banks are more resilient than they have been in a generation.
In a similar vein, Lawrence Summers, a former US Treasury Secretary, told Bloomberg News on Friday that there is “no systemic risk” provided the situation is “managed reasonably,” adding that he has “every reason to expect that it will be.”
But, the turmoil highlights the predicament banks may face if economic and financial conditions change quickly.
Low-yielding assets like bonds now have much lower value due to the increase in interest rates. When the bank wanted to raise money rapidly, that created issues.
“Falling bond prices are] only really an issue if your balance sheet is rapidly degrading… And you have to sell assets that you wouldn’t typically have to deal with, according to Luc Plouvier, senior portfolio manager at Dutch wealth management company Van Lanschot Kempen.
Other institutions may also need to address this issue, not just SVB.
Several organizations, including central banks, commercial banks, and pension funds, have assets that are far less valuable than what is shown in their financial accounts, according to Hagendorff. “The consequent losses will be significant and require funding in some way.