Analysis: Silicon Valley Bank’s fall isn’t systemic – but there are lessons to learn
The collapse of Silicon Valley Bank (SVB) should not pose a threat to wider financial stability in Europe, analysts argue, although it has thrown light on a series of issues that stakeholders will need to address.
Amidst a slump in bank’s share prices following SVB’s collapse, regulators have been rushing to restore confidence to a bruised sector.
But earlier today French finance minister Bruno le Maire said investors needed to “calm down” saying “there is no link between the different situations, there is no specific concern for the French banks.”
Experts were confident that the issues at SVB were unlikely to be repeated elsewhere. JP Morgan analysts said “we do not believe there is a banking crisis in the making”.
Similarly, Daniel Casali, chief investment strategist at Evelyn Partners said SVB’s collapse is “idiosyncratic not systemic”.
Europe’s largest banks are more diversified in terms of the assets they hold, making them less exposed to the kinds of problems that SVB faced – namely a massive exposure to increasing interest rates and a very concentrated deposit base.
Although the risk of contagion across Europe appears small, AJ Bell’s investment director Russ Mould noted “failures in the financial sector are often revealing of sensitivities to which investors had previously not given a huge amount of thought.”
Bond concerns
First and foremost among the issues revealed by SVB’s collapse is banks’ exposure to unrealised losses in bond portfolios.
As AJ Bell’s Russ Mould commented, “SVB’s sudden collapse was a reminder that many banks are sitting on large unrealised losses in their bond portfolios.”
Banks do not necessarily have a choice in loading up their portfolios with bonds, however. Capital requirements from regulators heavily encourage banks and pension funds to stock up on these perceived less-risky assets; an excellent idea, until those assets do in fact prove riskier than they seemed.
A crucial step in SVB’s collapse was its decision to sell a large bond portfolio – including many government bonds – for a $1.8bn loss, spooking investors.
Bloomberg Intelligence’s Philip Richards estimated that in total European banks sit on around €32bn in unrealised losses on sovereign bond holdings.
However, both Richards and Mould said that while the potential losses were significant, they also may never materialise. SVB was only forced to realise the losses because of the scale of the withdrawals it had to meet.
Large European banks are also much better capitalised than the relatively small SVB. As Richards said, “the size of the unrealized losses are typically less than 10 per cent of capital for most banks, vs. almost 90 per cent for SVB.”
Similarly, analysts at Jefferies wrote that “only a handful (of European banks) have anywhere near the same proportion of held to maturity assets/total assets as SIVB”.
In short, analysts agree that surprises in bond portfolios are unlikely to pose a major threat to European banks even if it is an area to keep an eye on.
Interest rates
Another risk – which analysts have been very aware of – is the broader effect that higher for longer interest rates will have on the financial sector.
Although the series of hikes has helped tackle price pressures, it has sent yields up sharply, exposing fragility in the financial system.
Following SVB’s implosion, policymakers may ease off aggressive interest rate hikes to calm the sector.
This is particularly true given the recent turmoil in the gilt market which was caused partly by spiking yields on UK government debt.
A Goldman Sachs note released today said “in light of the stress in the banking system, we no longer expect the FOMC to deliver a rate hike at its next meeting on March 22 (vs. our previous expectation of a 25bp hike).”
Digital bank runs
A “new risk” revealed by SVB’s collapse, Casali argued, is the possibility that online banking enables more devastating and accelerated bank runs.
Previous bank runs were characterised by queues of customers outside attempting to withdraw deposits. Online banking takes away the physical constraint on a bank run.
Online communication enables depositors to act en masse too, with reports Peter Thiel encouraged companies to withdraw their funds following the news that SVB was seeking to raise capital.
“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,” he said.