SVB is gone. But what happens next?
To the casual observer, you could be forgiven for arching an eyebrow when reading the soothing words from politicians and Central Bank chiefs that the collapse of Silicon Valley Bank in the US is not a systemic issue within the financial sector.
Banking stocks globally have been pummelled, the US Government has said all depositors with the bank will have their assets protected and the UK Government spent all weekend finding a buyer for SVB’s UK division. HSBC stepped up at 3am on Monday morning.
But how did we get here? Was this a rogue operation? Or is this the start – as some in the City are suggesting – of a repeat of the 2008 financial crash?
Speak to those in banking last Friday, the comparisons with the global financial crisis were clear for many to see.
SVB suffered a run that saw depositors withdraw an astonishing $42bn in a single day – arguably the biggest run on a bank ever.
The run started after SVB attempted to raise $2.5bn on the stock market to prop up its funds.
It needed the money after its bet on the bond market proved to be the wrong call.
Opting to buy big on bonds when interest rates were low has been a staple investment strategy since 2008 because of low interest rates.
But SVB’s play was backfiring because the value of the bonds had fallen significantly due to rising interest rates globally.
SVB decided not to hedge the bonds against any falls, and either failed to spot the tailwinds of soaring inflation post-Covid (as, to be fair, Central Banks did too) or somehow managed to miss the added inflationary pressures caused by the Russian invasion in Ukraine.
As any GCSE Economics student will tell you, Central Banks will attempt to quell inflation by raising interest rates – which they did.
But, in doing so, higher interest rates severely dented the bond market, reducing the value of SVB’s bond portfolio to levels that meant it risked breaching rules on levels of capital a bank must have on its books.
SVB needed cash. It spooked the market and a run was on.
The politicians would want you to believe that is the end of the matter. But investors clearly have other ideas and global banking stocks continue to fall.
Most experts agree that any major shock, like interest rates rising rapidly, will have unintended consequences, and that played out with SVB.
The question now is how far does it spread?
Investors and businesses, particularly those who bank with smaller lenders, will be asking whether their money is safe and if other banks have over-extended themselves in the bond market.
Mini-runs are already happening and even if a bank is solvent, any run can quickly trigger problems. It will be on banks and lenders to show quickly to investors that they are not in the same position as SVB. However, the chances that others are in a similar situation – sticking to strategies that rely on low interest rates and hoping for the speed of rate rises to ease off if the expected global recession materialises – could see further collapses.
The issue remains as to where those falls will come from and, currently, no one knows.
Investors and businesses may see little upside in keeping their money in a bank that could falter, so some will move to larger institutions. This could exacerbate the problem and most challengers would be wise to do all they can to reassure markets and regain some trust where possible.
But the risk with that is that it could strengthen bigger banks at a time when most are in agreement we need competition.
SVB specialised in lending to technology firms that struggled to raise funds through traditional banks. Maybe HSBC will use its new customers from SVB UK to see the value in supporting the sector.
However, some may fear the drawbridge could get pulled up and the tech firms of the future – which the UK Government is relying on for future growth – could be stifled.
These firms will need to improve due diligence and look to diversify their banking options to hedge against a repeat of this in the future.