The failure of Silicon Valley Bank (SVB) will not cause a crisis in the banking sector comparable to the credit crunch in 2007, according to most market experts.
SVB focused on the venture capital industry, taking in deposits from technology companies and start-ups, with a significant rise in deposits during the Covid-19 pandemic.
However, it did not have the systems and financial controls in place to deal with this growth and its structure and business model came under pressure in recent months after the firm put large amounts of money into long-dated bonds just before interest rates hikes.
Russ Mould, investment director at AJ Bell said: “SVB’s sudden collapse is a reminder that many banks are sitting on large unrealised losses in their bond portfolios. The difference for SVB is it had to realise these losses to shore up its balance sheet and, when it announced plans for a rescue share issue, a run on the bank ensued.
“Most big banks don’t have the liquidity problems SVB does – though the enforced closure of crypto-focused Signature Bank of New York over the weekend shows there are some others out there – so this does not look like anything on a par with the credit crunch in 2007.”
In comparison to SVB, large retail banks tend to have more diverse revenue streams, with large loans books and retail deposits. Their net interest margins have also grown with the hikes in interest rates.
In its latest financial stability report, the Bank of England reported that UK banks were sufficiently capitalised and resilient to deal with a deterioration in economic outlook.
Susannah Streeter, head of money and markets at Hargreaves Lansdown, said that the risks of contagion outside of smaller tech-focused banks were “limited”, alleviating fears that SVB’s collapse could spread to the UK as it served 3,300 clients on this side of the pond.
This morning, HSBC acquired SVB’s UK arm and will take on all its deposits and liabilities. The UK banking giant’s large liquidity means companies should be able to get the money they need to meet payroll requirements.
Analysts at Algebris Investments said that SVB was a “major outlier” in terms of its capital structure and that regulation brought in after the financial crisis now forces large banks to adopt a more cautious approach.
The company added: “Large banks are subject to more comprehensive and thorough regulation. For instance, in Europe, banks are limited in how much rate mismatching they can take on their held-to-maturity bond portfolios, due to Basel 4 regulations.
“This means that they will not face the same steep negative equity position that SVB found itself in with its deeply underwater securities book.”
Yet, not all agreed, with one expert suggesting that SVB could be the first– but not necessarily the last – victim of a decade and a half of easy money in a near zero interest rates environment supported by quantitative easing,.
Iain Cunningham, portfolio manager at Ninety One, said: “Economic cycles tend to be characterised by the growth of imbalances or excesses during the expansion, followed by their cleansing during recession. The false equilibrium of the past decade has created obvious imbalance and excess, and inflation has clearly broken the condition required to maintain it.
“The failure of SVB is a consequence of something much bigger and is likely to be the beginning of a broader delinquency, default and bankruptcy cycle rather than the end.
The US government has already announced via its Treasury secretary Janet Yellen that it will not bailout SVB’s investors. This contrasts with the interventions to save banks during the financial crisis in 2007-2008.
The US Department of Treasury, the Federal Reserve and the Federal Deposit Insurance Corporation said the government will however guarantee SVB customers’ deposits.