The failure of Silicon Valley Bank (SVB) on the 10th of March raised concerns about a global banking crisis – incorrectly being compared in the press to the 2008 global financial crisis. This article is designed to explain the reality of the failure of SVB, what has happened and what the potential impact may be on your investments.
What caused the collapse?
Silicon Valley Bank was the bank of choice for many Tech start-up companies. SVB was therefore not a typical bank with numerous small retail account holders. As a means of underpinning the security of deposits the bank held US Treasuries to help meet regulatory capital adequacy requirements. The issue started when the value of these treasuries fell markedly, meaning that when depositors wanted their money back SVB had to sell more Treasuries to meet capital withdrawals, which in turn impacted the bank’s capital adequacy. As a result, concerned customers tried to take their money out of the bank and SVB didn’t have enough free assets available.
Intervention from the Federal Reserve
On the 12th of March, the Federal Reserve (the Central Bank of the United States) stepped in to backstop SVB. This means they guaranteed the full capital deposit holders had within their accounts. Their intervention stopped more people from taking money out, reducing the rising alarm and retaining a degree of stability in the financial markets.
How is this different from the 2008 global financial crisis?
In 2008, banks across the world had far less capital adequacy than they have now, they were very exposed to sub-prime mortgage liabilities, which they are not now and they had not been stress tested by local regulators to ensure they had checks and balances in place to be able to assess counter-party risk. After 2008, robust measures were put in place to avoid the same mistakes being made again. The key difference now is regulators have the tools and the willingness to take the necessary action to ensure banks can operate normally and avoid a contagion in the sector, even if there’s an underlying issue.
Whilst stock markets have been volatile throughout this period, the swift and resolute action taken has helped to calm markets and even the take-over of Credit Suisse by USB in Switzerland over the weekend has not created any degree of panic. In fact, stock markets, reassured by the actions of Central Banks working in a unified manner, have rallied since the opening bell on Monday and bank shares are recovering well.
How does this affect interest rates and investments?
The US Federal Reserve and the UK Monetary Policy Committee of the Bank of England met this week to set interest rates. The impact of SVB has possibly been a factor in them both raising rates by 0.25% and not the 0.50% predicted for the US. The failure of a bank is in itself disinflationary, and this may have been part of the reason for the Central Banks’ decisions.
The silver lining from the SBV situation could be the premature end, or slowing down, of rising interest rate policies. An early interest rate peak could accelerate the onset of lower borrowing costs for companies and individuals moving forward and it should also help to generate progress in global stock markets.
Evaluating the situation today, there are no signs of deeper systemic issues in the banking community, so the advised course of action is to stay invested. The near 3% rise in the FTSE 100 Index since Monday morning is proof of that strategy. |