Asset Intelligence Comment: Silicon Valley Bank failure
By Tony Mee
Silicon Valley Bank (SVB) was a medium-sized regional US bank that specialised in providing banking services to entrepreneurial technology businesses within the US and UK.
On Wednesday 8 March SVB notified the market that it was $2 billion short of capital. By Friday US regulators had closed the bank due to a frenzied run by depositors. While it has been operating in a difficult environment of fast-increasing interest rates, its failure was less about the banking system as a whole and more due to its own failures of risk control. SVB is now the largest bank failure in the US since the global financial crisis.
Typical banking protocol is mainly to invest deposit funds in short-dated bond products such as Treasury notes or bills. Yet SVB strayed from this by investing a major proportion of client deposits in long-dated bonds, chasing returns by seeking assets with higher yields. What ensued was catastrophic, as these highly interest rate-sensitive instruments deteriorated in value as the US central bank increased interest rates sharply to rein in inflation.
Clearly regulators are concerned about possible contagion from this banking failure. Over the weekend, the US Federal Deposit Insurance Corporation (FDIC) stepped in to guarantee depositors’ funds. Additionally, the regulator has put SVB into administration and is seeking a banking partner to take over the bank.
In the UK HSBC, Europe’s largest bank, has agreed to buy the British arm of SVB, providing stability for UK depositors. This means that many fast-growing homegrown technology businesses will continue to have full access to their bank accounts and deposits.
In terms of ramifications for markets, investors, traders and regulators will be keeping a keen eye on the banking and financial sectors over the coming days and weeks. With recent economic data proving strong, including a robust labour market, core inflation has started to pick up again. This has led to the market pricing in a higher terminal interest rate in the United States recently. However, many commentators are now suggesting that the Federal Reserve may pause hiking rates this month to evaluate the stability of the financial environment prior to resuming monetary tightening.
Asset Intelligence believes that the SVB news, as well as recent failures in major cryptocurrency infrastructure, will cool market sentiment for the time being. We are currently underweight both equity and bond risk. We will continue to monitor this situation keenly.
Intended for Professional Financial Advisers only