Light wind of panic in the markets. The sudden rout of Silicon Valley Bank (SVB), closed on Friday by the US authorities, upended the entire banking sector on the Stock Market, markets wondering about the consequences of what represents not only the largest bank failure in the United States -United since the 2008 financial crisis, but also the second largest retail bank failure on the other side of the Atlantic.
Should we therefore fear widespread contagion, with cascading bankruptcies? Not really, according to experts. Explanations.
• What happened?
Unknown to the general public, the Californian bank SVB, the 16th largest US bank by asset size (209 billion dollars at the end of 2022), specializes in financing technology companies. For several months now, this sector has been facing difficulties that have reduced the ability of its actors to raise funds, even more so in an environment marked by a tightening of monetary policies by central banks.
It is in this context that SVB’s customers have massively demanded their money back. Problem: The bank was unable to meet this high demand for withdrawals.
To avoid facing a liquidity crisis, he announced late Wednesday that he would seek to raise capital quickly, without success, and sell $21 billion of financial securities, losing $1.8 billion along the way.
• What consequences?
This announcement, just days after the liquidation of Silvergate Bank, a mainly cryptocurrency establishment, surprised investors and reignited fears about the health of the entire banking sector, particularly with rapidly rising interest rates falling the value of the bonds in their portfolios.
Enough to trigger a panic in the markets where the four largest US banks lost $52 billion on Thursday.
In its wake, Asian and European banks also faltered. In Paris, Societe Generale lost 4.49%, BNP Paribas 3.82% and Crédit Agricole 2.48%. In the rest of Europe, the German bank Deutsche Bank fell 7.35%, the British Barclays 4.09% and the Swiss UBS 4.53%.
On Wall Street, the big banks rallied on Friday after the previous day’s rout: JPMorgan Chase gained 2.3% at mid-session, while Bank of America and Citigroup were close to breaking even. Regional banks, on the other hand, were more turbulent, First Republic and Signature Bank, for example, each falling 23%.
Given the inability of SVB to cope with the massive withdrawals of its clients, the US authorities officially took possession of the bank on Friday and entrusted its management to the US agency responsible for guaranteeing deposits (FDIC).
In the process, the USDC cryptocurrency, said to be “stable” because it is theoretically pegged to the dollar, was disrupted after its creator Circle revealed on its Twitter account that $3.3 billion of its assets were still in the pipeline. desks, inaccessible as they are, the FIDC only guarantees deposits up to $250,000 per client and per bank.
• Should we fear a new banking crisis?
For industry experts, the disappearance in just two days of SVB should have limited consequences for the banking sector. With AFP, Stephen Innes, an analyst at SPI Asset Management, wants to be reassuring by considering “low”, in a note, the risk “of a capital or liquidity incident among the big banks”. “The balance sheet of these big banks is not at all the same” as that of SVB, Diane Neuville, an analyst at ODDO BHF, confirmed to BFM Business.
The problems facing the bank “are very specific” and are not likely to “affect the entire banking sector, let alone the big banks,” said Ken Leon, an analyst at CFRA.
In fact, since the financial crisis of 2008/2009 and the bankruptcy of the US bank Lehman Brothers, banks have had to give reinforced guarantees of soundness to their national and European regulators. For example, they must demonstrate a higher minimum level of capital set aside to absorb any losses.
For Morgan Stanley analysts, “the funding pressures facing SVB are unique and should not be seen as the norm for other regional banks.” “I think we are in something quite isolated. And we must not forget what central banks have become, between the subprime crisis and today, the rather massive instruments of action that they have developed, their coordination… We are no longer in the world of 2008”, indicates in BFM Business Frédéric Farah, economist, teacher-researcher affiliated with the Phare laboratory of the Sorbonne.
US Treasury Secretary Janet Yellen said on Friday that the banking sector remains “resilient.” One of the White House economic advisers, Cecilia Rouse, highlighted for her part that the sector was “fundamentally different from what it was ten years ago.” However, for Morningstar’s Eric Compton, SVB’s setbacks are a reminder “that it can be very difficult to predict” how risks related to liquidity levels may evolve over the course of a quarter and “when they may materialise.”
The loss caused by the sale of SBV financial securities has also highlighted the risk posed to banks by the rise in interest rates operated for a year by the US central bank in an attempt to fight inflation. On the one hand, the banks benefit because their interest income from the loans they grant increases. But it also increases borrowing rates and affects “demand for loans,” he adds.
Also, rising interest rates automatically reduce the value of bonds held by banks. The FDIC recently warned that its potential losses in this regard currently stand at $620 billion. But there is no a priori reason why large banks, which have “sufficiently large” deposits from “diversified sources,” should be forced to sell bonds at a loss before they mature, Ken Leon says.
• What impact for the technology sector?
If the consequences for the banking sector are limited, the bankruptcy of SVB raises fears of a shock wave in the technology sector while several start-ups have seen their funds deposited in the bank blocked.
SVB boasted that it has “almost half” of its life sciences and technology companies financed by US investors. The bank’s orderly liquidation will allow them to recover up to $250,000 per customer, the maximum guaranteed by the FDIC. But, according to the annual report of SVB, the share of uninsured deposits amounted to about 96% of the total 173 billion dollars entrusted to the establishment.
The FDIC said Friday that the return of these funds would depend on the amounts recovered from the sale of the bank’s assets, an often lengthy process with uncertain profits. “The real victims of the fall of SVB are the depositors: start-ups with 10 to 100 employees, who can no longer pay salaries, will have to put people on technical strike or lay off on Monday,” he reacted, on Twitter , Garry Tan, CEO of Y Combinator, an incubator for young companies.
“Within a month or two, we will have wiped out a generation of American start-ups,” warned the leader. “Years of American innovation are at stake.”
Source: BFM TV
