The collapse of Silicon Valley Bank (SVB Financial) on Thursday (9 March) has hit headlines and markets but is unlikely to cause a systemic shock.
SVB had a very non-diversified business model compared to other banks. Most of its deposits came from corporates and start-up companies, that had cash but limited need for credit.
By contrast, larger, systemically important banks, which are under far greater regulatory scrutiny, don’t have the same concentrated levels of deposits or exposure to one area.
Since SVB’s collapse, we’ve seen further turbulence and questions around the situation of large banks in Europe. We think solvency concerns for large banks are exaggerated though. While there will be profitability implications for the banking sector as a whole, large European banks have strong liquidity and are stress tested regularly for scenarios such as rising interest rates.
The US authorities acted quickly to nip any potential contagion from SVB’s collapse in the bud. A package of measures has already been announced by the US Federal Reserve (Fed), Federal Deposit Insurance Corporation and US Treasury which includes all SVB depositors getting their money back.
Sven Balzer, Head of Investment Strategy at Coutts, says: “The SVB insolvency did hit markets and investors very abruptly, and at incredible speed, which led to equally quick market reactions. Risk assets were sold and government bonds bought. But the US authorities are fortunately reacting swiftly as they seek to counter the deposit loss dynamic in regional banks.
“The interventions announced by those authorities to protect all SVB depositors should help the risk environment and limit potential contagion, while the announcement that HSBC will buy SVB UK should provide some reassurance to the UK banking sector.”
He adds: “It’s important to put SVB into context. Its business model and balance sheet risk management stood out amongst its peers.”