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SVB, SBNY Fallout: Why Contagion Risk to Other Banks is Remote
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Over the weekend, two S&P 500 banks — SVB Financial Group and Signature Bank (SBNY - Free Report) — failed, signaling the largest U.S. bank failures since Washington Mutual in 2008.
Fear rattled Wall Street, and indexes, including the S&P 500, the S&P Banks Select Industry Index and the KBW Bank Index tumbled 3.2%, 10.6% and 11.3%, respectively, since Wednesday end, indicating a broader sell-off in the banking industry.
The weekend’s turbulence came after regulators closed Silicon Valley Bank on Friday and shares of its parent company, SVB Financial (the country’s 16th largest bank), fell more than 60%. On Sunday, regulators seized New York-based Signature Bank.
We believe the market run-off in the past two trading days, sparked from the fears regarding the effectiveness of the U.S. banking system and a likely 2008-like crisis re-run, are overblown. The steps taken by U.S. regulatory agencies should be enough to calm the financial markets and offer reassurance that such shocks would be mitigated. Also, lenders’ weakness is not reflective of an industry-wide problem.
Silicon Valley Bank Collapse a Unique Event
It appears that Silicon Valley Bank’s collapse was primarily due to poor risk-management decisions. The bank had significant deposits from the tech startup industry and invested these funds in long-term, fixed-rate, government-backed debt securities, exposing the bank to double sensitivity to higher interest rates. With the tech startup industry seeing a severe downturn, depositors started withdrawing significant funds. The bank was forced to dump some of its Treasuries at a loss of $1.8 billion to fund its customers’ withdrawals.
Encouragingly, SVB Financial received acquisition interest from JPMorgan Chase & Co (JPM - Free Report) and ThePNC Financial Service Group, Inc. (PNC - Free Report) over the weekend. Per a Reuters article that cited Axios, JPM and PNC, along with Apollo Management and Morgan Stanley, were part of a discussion to acquire SVB Financial in a deal that would exclude its commercial banking division, Silicon Valley Bank.
In a move to avert chaos across the tech sector in the U.K., HSBC Holdings has agreed to buy Silicon Valley Bank UK Limited for a nominal £1. Noel Quinn, the CEO, said, “This acquisition makes excellent strategic sense for our business in the UK. It strengthens our commercial banking franchise and enhances our ability to serve innovative and fast-growing firms, including in the technology and life-science sectors, in the UK and internationally.”
U.S Agencies Take Steps to Prevent More Bank Runs
Also, on Sunday, the Treasury Department, the Federal Reserve and the FDIC said that all Silicon Valley Bank customers would be protected and able to access their funds deposited in the bank starting Mar 13. It must be noted that approximately 90% of SVB Bank customer deposits were not insured as per the FDIC rule, which covers up to $250,000 per deposit per bank.
The agencies also announced a similar “systemic risk exception” for insured and uninsured customers of Signature Bank, giving access to all their deposits on Monday.
“This step will ensure that the U.S. banking system continues to perform its vital roles of protecting deposits and providing access to credit to households and businesses in a manner that promotes strong and sustainable economic growth,” the agencies said in a joint statement.
The Fed on Sunday announced a new expansive emergency lending program - the Bank Term Funding Program (BTFP) - in efforts to limit the contagion risk from small to large banks and shore up confidence in the banking system.
The Fed's new U.S. bank funding program will allow banks and other eligible depository institutions (that need to raise cash to pay depositors) to borrow money from the Fed by posting securities as collateral rather than having to sell them significant losses.
While the Treasury has set aside $25 billion to offset any losses incurred under the BTFP, the central bank does not expect to have that money, as the collateral securities have low default risk.
A Slowdown in Rate Hike to the Rescue
Janet Yellen, the Secretary of the Treasury, noted that interest rate hikes by the Fed to combat “sticky” inflation were a key issue for the collapse of Silicon Valley Bank. Many of its assets, such as bonds or mortgage-backed securities, lost market value as rates climbed.
In light of the recent volatility in the banking sector, markets no longer expect the pace of rate hikes to continue at Fed’s March meeting. According to CME Group, traders do not expect a 50-basis point rate hike in March and a 65% chance of a 25-basis point rate hike.
While rising interest rates are a boon for banks, the current situation shows that faster rate hikes have their fall out. Last week, KeyCorp (KEY - Free Report) , at an investors’ conference, revised its 2023 outlook for net interest income lower amid rising funding costs and deposit betas.
Parting Thoughts
Post the 2008-crisis, the U.S. banking system that has undergone multiple stress tests by regulators, is in notably good shape and holds more capital than ever, indicating the ability to withstand even an economic slowdown. Lastly, even if banks did have to realize the losses like Silicon Valley Bank, it would not affect the solvency of most banks with small treasury books.
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SVB, SBNY Fallout: Why Contagion Risk to Other Banks is Remote
Over the weekend, two S&P 500 banks — SVB Financial Group and Signature Bank (SBNY - Free Report) — failed, signaling the largest U.S. bank failures since Washington Mutual in 2008.
Fear rattled Wall Street, and indexes, including the S&P 500, the S&P Banks Select Industry Index and the KBW Bank Index tumbled 3.2%, 10.6% and 11.3%, respectively, since Wednesday end, indicating a broader sell-off in the banking industry.
The weekend’s turbulence came after regulators closed Silicon Valley Bank on Friday and shares of its parent company, SVB Financial (the country’s 16th largest bank), fell more than 60%. On Sunday, regulators seized New York-based Signature Bank.
We believe the market run-off in the past two trading days, sparked from the fears regarding the effectiveness of the U.S. banking system and a likely 2008-like crisis re-run, are overblown. The steps taken by U.S. regulatory agencies should be enough to calm the financial markets and offer reassurance that such shocks would be mitigated. Also, lenders’ weakness is not reflective of an industry-wide problem.
Silicon Valley Bank Collapse a Unique Event
It appears that Silicon Valley Bank’s collapse was primarily due to poor risk-management decisions. The bank had significant deposits from the tech startup industry and invested these funds in long-term, fixed-rate, government-backed debt securities, exposing the bank to double sensitivity to higher interest rates. With the tech startup industry seeing a severe downturn, depositors started withdrawing significant funds. The bank was forced to dump some of its Treasuries at a loss of $1.8 billion to fund its customers’ withdrawals.
Encouragingly, SVB Financial received acquisition interest from JPMorgan Chase & Co (JPM - Free Report) and The PNC Financial Service Group, Inc. (PNC - Free Report) over the weekend. Per a Reuters article that cited Axios, JPM and PNC, along with Apollo Management and Morgan Stanley, were part of a discussion to acquire SVB Financial in a deal that would exclude its commercial banking division, Silicon Valley Bank.
In a move to avert chaos across the tech sector in the U.K., HSBC Holdings has agreed to buy Silicon Valley Bank UK Limited for a nominal £1. Noel Quinn, the CEO, said, “This acquisition makes excellent strategic sense for our business in the UK. It strengthens our commercial banking franchise and enhances our ability to serve innovative and fast-growing firms, including in the technology and life-science sectors, in the UK and internationally.”
U.S Agencies Take Steps to Prevent More Bank Runs
Also, on Sunday, the Treasury Department, the Federal Reserve and the FDIC said that all Silicon Valley Bank customers would be protected and able to access their funds deposited in the bank starting Mar 13. It must be noted that approximately 90% of SVB Bank customer deposits were not insured as per the FDIC rule, which covers up to $250,000 per deposit per bank.
The agencies also announced a similar “systemic risk exception” for insured and uninsured customers of Signature Bank, giving access to all their deposits on Monday.
“This step will ensure that the U.S. banking system continues to perform its vital roles of protecting deposits and providing access to credit to households and businesses in a manner that promotes strong and sustainable economic growth,” the agencies said in a joint statement.
The Fed on Sunday announced a new expansive emergency lending program - the Bank Term Funding Program (BTFP) - in efforts to limit the contagion risk from small to large banks and shore up confidence in the banking system.
The Fed's new U.S. bank funding program will allow banks and other eligible depository institutions (that need to raise cash to pay depositors) to borrow money from the Fed by posting securities as collateral rather than having to sell them significant losses.
While the Treasury has set aside $25 billion to offset any losses incurred under the BTFP, the central bank does not expect to have that money, as the collateral securities have low default risk.
A Slowdown in Rate Hike to the Rescue
Janet Yellen, the Secretary of the Treasury, noted that interest rate hikes by the Fed to combat “sticky” inflation were a key issue for the collapse of Silicon Valley Bank. Many of its assets, such as bonds or mortgage-backed securities, lost market value as rates climbed.
In light of the recent volatility in the banking sector, markets no longer expect the pace of rate hikes to continue at Fed’s March meeting. According to CME Group, traders do not expect a 50-basis point rate hike in March and a 65% chance of a 25-basis point rate hike.
While rising interest rates are a boon for banks, the current situation shows that faster rate hikes have their fall out. Last week, KeyCorp (KEY - Free Report) , at an investors’ conference, revised its 2023 outlook for net interest income lower amid rising funding costs and deposit betas.
Parting Thoughts
Post the 2008-crisis, the U.S. banking system that has undergone multiple stress tests by regulators, is in notably good shape and holds more capital than ever, indicating the ability to withstand even an economic slowdown. Lastly, even if banks did have to realize the losses like Silicon Valley Bank, it would not affect the solvency of most banks with small treasury books.