SVB fallout: Global convulsions, contagion fears, $465bn stock wipeout

Global finance industry is facing an upheaval after the spectacular failure of Silicon Valley Bank, followed by the sudden closure of New York’s Signature Bank by state regulators on Sunday.
SVB’s sudden demise and the aftershocks reverberating from America’s biggest bank failure in almost 15 years have rattled the industry in the US and beyond.
As the only publicly traded bank focused on Silicon Valley and new tech ventures, SVB was deeply embedded in the US startup scene.
According to its website, SVB did business with nearly half of all US venture capital-backed startups and 44% of US venture-backed tech and healthcare companies that went public last year.
On March 8, its parent company, SVB Financial Group, announced it had sold $21bn of securities from its portfolio at a loss of $1.8bn and would sell $2.25bn in new shares to shore up its finances. That unnerved a number of prominent venture capitalists, which were said to have instructed their portfolio businesses to pull their cash from the bank.
By March 10, the effort to raise new equity or find a buyer had been abandoned, and the bank was put into receivership by the Federal Deposit Insurance Corp.
Several factors — some unique to SVB; others systemic in banking — came together to cause SVB’s downfall.
Behind most of them are the rapid interest-rate increases pushed through over the last year by the US Federal Reserve to tame the highest inflation in decades.
One consequence of those hikes that hit SVB especially hard was the sharp downturn in the high-flying tech companies that had been the source of its rapid growth; while most banks have broader customer bases.
As venture capital dried up, SVB’s clients tapped their deposits to withdraw cash they needed to keep going.
Risk assets got pummelled last week, with the US stock benchmark suffering its worst week since September. Wall Street’s so-called “fear gauge” spiked, with the Cboe Volatility Index rising above 30 for the first time since October.
The aggregate market value of companies included in the MSCI World Financials Index and the MSCI EM Financials Index dropped by about $465bn over Friday and Monday, according to a Bloomberg report.
But several experts have said any ripple effects in the rest of the banking sector may be limited as larger institutions have more diverse portfolios and deposit clientele than SVB did.
The turmoil has caused a rapid repricing in markets for where the Fed will take policy. Swaps traders are now pricing a less than one-in-two chance the Fed will hike by another quarter point this cycle.
US banks had booked $620bn in unrealised losses on their available-for-sale and held-to-maturity debts at the end of last year, according to filings with the FDIC.
US President Joe Biden pledged on Monday to do whatever was needed to address a banking crisis.
US regulators have put together an emergency package of support for financial institutions. The moves are designed to prevent any further failures by easing fears of large losses among uninsured big depositors, even as a debate continues over how widespread the problems are.
SVB’s collapse, the largest bank failure since the 2009 financial crisis, has raised questions about hidden weaknesses that could have consequences for customers and employees and potentially highlight issues in other banks.
SVB’s plight could lead to a loss of confidence, tougher regulation and investor scepticism about the financial health of smaller US banks that were seen as adequately capitalised after regulators forced banks to hold more capital in the aftermath of the 2008 crisis, according to experts.