Silicon Valley Bank Failure

On Wednesday 8^th March, Silicon Valley Bank (SVB) informed the markets of its $2 billion shortfall of capital. Within 48hrs, US regulators had closed the bank due to a run by depositors to withdraw funds.

Our Economist, Michael Hughes, has provided the following comment:

This is another example of the distortions caused by zero interest rate policies for many years. That policy encouraged investing in risky assets particularly start-up tech. As rates rose quite sharply, investors cut their positions. IPOs for tech dried up and tech companies tried to use what cash they had – many in SVB, to keep the business going. As withdrawals gathered momentum SVB looked to raise capital, but with no success. Hence, their bankruptcy.

However, the good news is how well and speedily this situation has been handled. While other distortions will doubtless come to light, the policy responses to date have been impressive. It also lowers the risk of further aggressive rate rises.

SVB’s downfall was less about the US banking system failing and more so about it’s inability to manage its own level of risk. Rapidly rising interest rates in the US to fight inflation and a lack of risk management has led to the bank being unable to meet its needs in the short term.

Whilst most banks would seek to invest deposited funds into short-dated bonds, SVB strayed from this and invested a large proportion of client deposits into longer-dated bonds. Longer-dated bonds are more sensitive to movements in interest rates than short-dated bonds.

SVB’s collapse is the biggest bank failure since the financial crisis in 2008 and yesterday, Sunday 12^th March, Signature Bank has also failed.

In the UK HSBC, Europe’s largest bank, has agreed to buy the British arm of SVB, providing stability for UK depositors. This ensures that many fast-growing homegrown technology businesses will continue to have full access to their bank accounts and deposits.  Likewise in the US, the Treasury has announced that all deposits in SVB will be protected, even those that are above the “insured” level of $250,000.

Is there to be a contagion effect?

The real answer to this is – only time will tell. Recent economic data has been strong, including a robust labour market, and core inflation in the US had started to pick up again. This has led to the markets pricing in higher interest rates in the US.

Following this event, many market commentators – including us, are now suggesting that the US Federal Reserve may pause hiking rates further this month to evaluate the stability of the financial environment before resuming any additional monetary tightening.

In the short term, we expect markets to be volatile whilst investors await further news on the impacts of SVB’s failure, however at the current time we do not anticipate this becoming a long-term crisis.

We will continue to monitor the situation very closely, should you have any questions, please do not hesitate to contact your Fiducia adviser.