SVB departure a sign of concern but limited contagion: analysts

NEW YORK: Silicon Valley Bank’s surprisingly quick implosion has markets jittery amid a possible sign of widespread turmoil, but analysts see limited risk of financial contagion.

The SVB’s problems are the result of “idiosyncratic stresses and not one that we see as systemic that would affect the banking industry,” said Ken Leon of CFRA Research, saying tougher US regulations enacted after the 2008 financial crisis would have helped to contain the problems.

A note from Morgan Stanley analysts put it simply: “We want to be very clear here…we do not believe there is a liquidity crisis in the banking sector and most of the banks in our coverage have adequate access to liquidity.” ”

Treasury Secretary Janet Yellen described the US banking sector as “resilient,” while Cecilia Rouse, chair of the White House Economic Advisory Council, also cited US reforms to argue that disaster would be averted.

“Our banking system is in a fundamentally different place than it was a decade ago,” Rouse said at a White House briefing on Friday.

After the collapse of Lehman Brothers in 2008 and the ensuing financial crisis, US regulators required big banks to hold additional capital in case of trouble. US and European authorities also organize regular “stress tests” to uncover vulnerabilities in the largest banks.

For Morningstar analyst Eric Compton, the suddenness of SVB’s demise underscores “that it can be very difficult to predict how funding pressures will change in any given quarter and when those risks may materialize,” he said in this week a note.

The SVB, which was officially closed by US authorities on Friday and placed under receivership, was at risk due to a high concentration of its customer profile, according to Morgan Stanley.

SVB “primarily banks technology, life sciences and healthcare companies and is an integral part of the venture capital ecosystem,” Morgan Stanley said.

But the tech sector was hit hard by the dramatic reversal in US monetary policy, with much higher lending rates leading to high deposit withdrawals.

– Run on deposits –

Faced with a need to raise money quickly, SVB sold around $21 billion worth of securities, resulting in a $1.8 billion loss.

With many SVB customers holding more than the $250,000 reimbursed by US-insured institutions, customers began withdrawing funds en masse, hastening the bank’s collapse.

After the SVB disclosure on Wednesday, investors punished the banking sector as a whole on Thursday. But through Friday, shares in some of the larger banks were posting gains.

But that still left many regional lenders under pressure, including First Republic Bank, which plunged 15 percent, and Signature Bank, a cryptocurrency-exposed lender, which plunged 23 percent.

The failure of the SVB has also drawn attention to the risks to financial institutions posed by the Federal Reserve’s aggressive anti-inflation policy.

On the one hand, higher interest rates help banks by allowing them to charge more interest on loans.

At the same time, the postponement is dampening demand for credit, CFRA’s Leon said.

Another concern is the impact on bank bonds, which fall in value as interest rates rise.

At the end of 2022, banks had approximately $620 billion in “unrealized losses” related to these securities, according to the FDIC.

But the turmoil is not having an existential impact on the largest banks, whose total assets “exceed” the potential calls on those bonds and are diversified, Leon said. -AFP