The impact of Silicon Valley Bank's collapse: what's next for the markets?

Lesego Mthombothi 16/03/2023
  The impact of Silicon Valley Bank's collapse: what's next for the markets?   The impact of Silicon Valley Bank's collapse: what's next for the markets?
The impact of Silicon Valley Bank's collapse: what's next for the markets?

Global markets have been shaken by the collapse of Silicon Valley Bank (SVB), a US-based financial institution primarily serving the technology, life science, and venture capital industries.   

The news of SVB being in hot water sent investors and depositors scrambling for their funds, triggering a 42-billion-dollar bank run. 

On 10 March, the California Department of Financial Protection and Innovation shut down Silicon Valley's biggest bank.  

Over the weekend, the US government announced that extensive measures are being taken to ensure all depositors receive their funds back. Meanwhile, in the United Kingdom, HSBC acquired SVB's UK division.  

On 13 March, Tim Mayopoulos was appointed as the new CEO of SVB. His first order of business was to reassure everyone that the bank would be operational and ready to receive and hold deposits again. He urged venture capital firms and tech customers to help the bank regain stability by entrusting funds back to SVB. Mayopoulos emphasised that depositors will have full access to their money as all new and old deposits are protected by the FDIC.  

Read the full recount of SVB’s collapse here

How will SVB's collapse affect other markets?  

Authorities in the US and Europe are closely monitoring the banking sector as there are already indications of tension with other banks. Trading of First Republic Bank (FRC) and PacWest Bancorp (PACW) shares was suspended on Monday after the prices plunged by 65% and 52%, respectively. Charles Schwab (SCHW) stocks also took a hit, declining by 11.57% on Monday.  

In Europe, the Stoxx Europe 600 Banks index, which tracks 42 major EU and UK banks, tumbled by 5.8% on Monday, marking its most substantial decline since March last year. Shares in Credit Suisse, the beleaguered Swiss banking giant, were down by 9%.  

SVB is not the only financial institution that has witnessed a significant drop in the value of its investments in government bonds and other assets. By the end of 2022, the FDIC reported that US banks were sitting on USD 620 billion worth of unrealised losses.  

What is happening to Signature Bank?  

Following SVB, Signature Bank, a New York-based regional bank known for its cryptocurrency lending, suddenly closed on 12 March, making it the third-largest bank failure in US history.  

New York Regulators shut down Signature Bank, citing that the bank's continued operations could threaten the financial system's stability.  

According to the New York Department of Financial Services, the bank had over USD 110 billion in assets and over USD 88 billion in deposits. Many investors fear a recurrence of the 2007-2008 financial crisis as Signature Bank is the third regional bank to collapse in the last two weeks after Silvergate Bank and SVB. This has put investors on high alert, concerned about widespread financial vulnerability.   

Despite Signature Bank's announcement on Thursday of new financial data and limited crypto deposit balances to increase diversification, customers swiftly withdrew their deposits on Friday, causing its stock price to plummet nearly 25%, from USD 87 to USD 70.   

Anticipating Signature Bank’s closure, customers moved their deposits to larger, more established banks, such as JPMorgan Chase and Citigroup.

Where to from here?  

The failure of SVB and Signature Bank could trigger more bank runs with similar lending and liquidity profiles. Despite the actions taken by the Fed and US Treasury, the majority of depositors are still worried. There is also a risk of foreign contagion, further failures in the crypto market, and broader contamination of other financial markets. Worst case scenario, the global economy takes a significant hit.  

In addition, the dissolution of SVB could create a hole in the funding market for tech firms, leading to a flight for safety toward traditional banks that are less complex but are less willing to offer customised capital. This could also lead banks and firms to sell assets at a loss to shore up their balance sheets and remain liquid. The systemic risk exemption granted to the two banks in crisis by the FDIC may also have unknown externalities on the banking structure and governance.   

The crisis at SVB has brought private tech investments into the spotlight. For instance, the collapse could subject SoftBank Group Corp's investments to increased scrutiny. SoftBank is a Japanese multinational conglomerate holding company primarily investing in technology, energy, and financial sectors.   

Investors are now concerned about the vulnerability of startup firms in SoftBank Vision Funds. SoftBank's shares have declined by 13% in just four sessions, falling below 5,000 yen and approaching a level that could trigger a buyback announcement.   

This series of events could have various impacts on the technology industry. It may become more challenging for startups to secure funding and force them to modify their business models.  

Signature Bank's failure will likely increase scrutiny of banking regulations, risk management strategies, and partnerships with crypto companies. 

The impact on the crypto industry is expected to be short-term, as major cryptocurrencies like Bitcoin and Ethereum have already recovered, indicating increased confidence in independent decentralised assets.  

In the short term, the loss of SVB will be felt, but the longer-term impact of its closure will be more severe, as it is a specialised bank with many unique tools, networks, and knowledge. SVB provided opportunities for venture capitalists and entrepreneurs to meet, creating vital webs of human connection. It made quick turnarounds on mortgages, guiding and mentoring founding teams on growing businesses, investing in startups, and supporting the venture capitalists who collaborated with them.  

What do you think of the SVB collapse and the subsequent bank failures? Is it time to invest in safe-haven assets, or do you trust that the system will recover in time? 

CFD trading presents traders with the opportunity to make the most of any situation. Whether the markets continue to crash, or the banks recover, CFD traders can benefit by going long or short on the stocks, indices, and cryptocurrencies that are affected. 

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