Will the SVB collapse bring on another GFC?
While the collapse of Silicon Valley Bank may not lead to a major financial crisis, it could still have implications for the banking system and the technology sector, prompting caution among investors.
There is one big question every investor is asking right now: “What does the rapid collapse of Silicon Valley Bank mean?”
The problem is that nobody is quite sure at this stage, given that the ramifications of the collapse are as unknown as the collapse was unexpected.
There are scenarios in which the collapse of SVB Corporation could light the fuse to a string of further regional bank collapses across the United States and potentially further afield.
Or it could also be that there are special features surrounding Silicon Valley Bank and its concentration on the shrinking technology sector that set it up for failure but don’t really have industry wide ramifications.
SVB not a normal bank
What is unarguable is that an unexpected bank collapse is sure to ramp up caution across the world and could certainly cause specific issues within the technology sector, which is already shrinking itself with rapid job losses after the rapid rise in interest rates saw investors change their settings from growth to value.
We have already seen what investors do in the face of uncertainty – if they had deposits in Silicon Valley Bank they moved to get their money out as fast as they could and if they are have invested in Australian banks they sell first and ask questions later.
The reason the SVB collapse is so hard to get a read on is that the current economic setting is widely considered to be positive for conventional banks which have been able to raise their loan rates faster than their deposit rates and enjoy increased net interest margins and profits.
That does not seem to have been the case for SVB, which seems to have suffered from a liquidity crisis somewhat similar to the classic depiction of a bank run shown in the film classic Mary Poppins.
While the bank may have had adequate liquidity to cope with normal conditions, once there was a “run” of large depositors wanting to cash out their accounts, it simply ran out of available cash.
A “run” on large deposits brought losses to account
In the case of SVB, it had a combination of large, uninsured deposits (above US$250,000) and was sitting on unrealised US Government Bond losses that became apparent once it started selling to meet depositor demands for cash.
US Treasury Bonds taken out when interest rates were very low have rapidly fallen in price due to the low yields on offer, which means they can incur quite large capital losses if sold before they mature.
Indeed, by selling US Treasury bonds to lock in funding costs due to expectations of higher interest rates, SVB made a loss of US$1.8 billion.
Unlike most banks in the US, SVB had 89% of it US$175 billion in deposits uninsured at the end of 2022.
Uninsured deposits became hot money
Those uninsured deposits were obviously “hot money” and as soon as SVB could no longer offer the best deposit rates or the depositors got nervous, that hot money would rush to the exits to find the higher rates on offer at other banks.
These two factors are likely to form the basis of the wash up to the collapse of SVB with a very quick examination of any other large regional banks that had a similar structure to SVB with a large percentage of uninsured deposits and large, unrealised losses.
Most US banks will have a large percentage of their deposits guaranteed or insured by the Federal Deposit Insurance Corp (FDIC), so they shouldn’t suffer from the same fate as SVB.
That doesn’t mean they are immune to any contagion effects from the collapse, which could particularly hit any banks that had connections to SVB.
At this stage the risks of a major contagion event seem small but that doesn’t mean it will not happen.
A quick bank sale might bring some hope
Perhaps the best result for everyone with links to SVB would be a fairly rapid sale of the bank, which at this stage could be rapidly turned around by an investor with deep pockets and a plan to return the bank to profitability.
Such a sale could eventuate within days or it might take months.
At the same time investors who have seen more than $US100 billion shredded from the market valuation of the big US banks will be nervously awaiting any changes to the bank regulations in the wake of this collapse to mirror the changes brought in after the Global Financial Crisis but to some extent watered down during the Trump years.
Australian investors might be sitting on the sidelines for the US part of this banking sideshow but that doesn’t mean it won’t be significant for us.
Australia on the sidelines waiting for impact
While the likelihood of any direct contagion effects to Australian banks are very slim, as we learned in the GFC back in 2007 that doesn’t mean that parts of the banking system can’t begin to freeze up and in this case there could also be a rapid chilling to the technology sector due to SVB’s role with technology start-ups.
In short, it is hard to be precise at this stage about how significant the collapse of SVB will be – it could be a footnote in financial history or the fulcrum around which a major financial crisis develops.
It sounds facile to say we will have to wait and see but that is the honest answer at this stage.
This doesn’t look like developing into a major financial crisis at this stage but it is hardly an encouraging development either.
Hopefully the lessons and the global regulations developed in the aftermath of the GFC will hold up to the rigours of a fast and furious bank collapse.