Erste Asset Management Investment Blog

Silicon Valley Bank – Impact on the Stock Markets

Silicon Valley Bank – Impact on the Stock Markets
BRITTANY HOSEA-SMALL / REUTERS / picturedesk.com

The turbulences surrounding the US Silicon Valley Bank (SVB) are currently keeping the markets busy. After the bank was closed last Friday, a comprehensive package of measures followed over the weekend to avoid possible consequences. In this blog post, the experts of our Investment Division explain what exactly happened and how they assess the situation.

What had happened?

Silicon Valley Bank (SVB), headquartered in Santa Clara, California, specialized in financial services for startups and high tech companies. In recent days and weeks, the bank has been confronted with increased outflows of deposits from customers. As a result, approximately USD 20 billion worth of bonds that the bank held as investments were sold to cover the outflows. These bonds were primarily credit-backed government and mortgage bonds. According to media reports, these were purchased by Silicon Valley Bank during the Corona crisis. Although these bonds had little to no credit risk, they still had longer maturities. As a result, they had a higher sensitivity to yield increases.

Due to the general increase in yields since the beginning of 2022, the price of these bonds fell significantly, forcing the bank to realize losses on these positions. This in turn triggered concerns among depositors that the bank could face insolvency problems, which led even more customers to withdraw their funds.

On Friday evening (European time), the bank’s bankruptcy was sealed. Customers had requested withdrawals in the amount of USD 42 billion in a single day, representing about a quarter of the bank’s total deposits. Silicon Valley Bank was unable to service these outflows.

Source: Refinitiv Datastream; Data as of 13.03.2023; Note: Past performance is not a reliable indicator of future performance.

How did the markets react?

The Federal Deposit Insurance Corporation (the US banking regulator that guarantees deposits up to USD 250,000) then declared the company insolvent and took over its control. The rush of customers had become so great that the bank’s coffers were completely emptied and it had a “negative cash balance” of USD 1 billion.

In the last trading sessions, the markets reacted volatile to the problems around the Silicon Valley Bank. The US leading index S&P 500 lost about 3.2% on Thursday and Friday, at the start of the week on Monday it lost a slight 0.2%. Yields on 10-year US Treasury bonds fell 40 basis points to around 3.6%. In our view, the latter is

  1. on a “flight to the safe haven” (US government bonds) and
  2. on the expectation of postponed key interest rate increases

due to the bankruptcy. In addition, another bank (Signature Bank) went bankrupt on Sunday.

What measures did the authorities take?

Over the weekend, the authorities in the USA also intervened. Late Sunday evening, the US Treasury, the Federal Deposit Insurance Corporation and the Fed announced joint measures. A new program (Bank Term Funding Program) was announced that provides liquidity to institutions. Banks can deposit government bonds and other financial instruments as collateral under this program. The collateral can be deposited at nominal value rather than at market price. In this way, forced sales, as happened with SVB, are to be avoided. In addition, SVB depositors were given access to all their funds on Monday, including balances exceeding the FDIC guarantee threshold of USD 250,000.

How do we assess the situation?

We assume that the policy measures announced so far are a clear sign that the US government is doing everything in its power to prevent a systemic crisis in the US banking sector. There are currently no classic signs of contagion to other institutions, such as additional stress in the interbank market. According to the Financial Times, the estimated unrealized losses in the US banking sector amount to approximately USD 620 billion. This compares with equity capital of the entire sector of approximately USD 2.2 trillion.

In addition, Silicon Valley Bank (SVB) also differs significantly from major US banks in its business model. The focus of this bank is on business customers from the technology and start-up sectors.

Nevertheless, the situation at Silicon Valley Bank is a reminder that the Fed’s rate hikes are having an impact, even though the economy has held up well so far. The risk, in our view, is that the cost of capital for banks, and thus for companies, could rise on a sustained basis. As a result, lending rates could also move further upward. In our view, this has also made an acceleration of the interest rate hike cycle less likely after the head of the US Federal Reserve, Powell, made inflation-fighting statements in two speeches to subcommittees of the US Congress.

For a glossary of technical terms, please visit this link: Fund Glossary | Erste Asset Management

Legal note:

Prognoses are no reliable indicator for future performance.

RESPOND TO THE ARTICLE

Legal disclaimer

This document is an advertisement. Unless indicated otherwise, source: Erste Asset Management GmbH. The language of communication of the sales offices is German and the languages of communication of the Management Company also include English.

The prospectus for UCITS funds (including any amendments) is prepared and published in accordance with the provisions of the InvFG 2011 as amended. Information for Investors pursuant to § 21 AIFMG is prepared for the alternative investment funds (AIF) administered by Erste Asset Management GmbH pursuant to the provisions of the AIFMG in conjunction with the InvFG 2011.

The currently valid versions of the prospectus, the Information for Investors pursuant to § 21 AIFMG, and the key information document can be found on the website www.erste-am.com under “Mandatory publications” and can be obtained free of charge by interested investors at the offices of the Management Company and at the offices of the depositary bank. The exact date of the most recent publication of the prospectus, the languages in which the key information document is available, and any other locations where the documents can be obtained are indicated on the website www.erste-am.com. A summary of the investor rights is available in German and English on the website www.erste-am.com/investor-rights and can also be obtained from the Management Company.

The Management Company can decide to suspend the provisions it has taken for the sale of unit certificates in other countries in accordance with the regulatory requirements.

Note: You are about to purchase a product that may be difficult to understand. We recommend that you read the indicated fund documents before making an investment decision. In addition to the locations listed above, you can obtain these documents free of charge at the offices of the referring Sparkassen bank and the offices of Erste Bank der oesterreichischen Sparkassen AG. You can also access these documents electronically at www.erste-am.com.

N.B.: The performance scenarios listed in the key information document are based on a calculation method that is specified in an EU regulation. The future market development cannot be accurately predicted. The depicted performance scenarios merely present potential earnings, but are based on the earnings in the recent past. The actual earnings may be lower than indicated. Our analyses and conclusions are general in nature and do not take into account the individual characteristics of our investors in terms of earnings, taxation, experience and knowledge, investment objective, financial position, capacity for loss, and risk tolerance.

Please note: Past performance is not a reliable indicator of the future performance of a fund. Investments in securities entail risks in addition to the opportunities presented here. The value of units and their earnings can rise and fall. Changes in exchange rates can also have a positive or negative effect on the value of an investment. For this reason, you may receive less than your originally invested amount when you redeem your units. Persons who are interested in purchasing units in investment funds are advised to read the current fund prospectus(es) and the Information for Investors pursuant to § 21 AIFMG, especially the risk notices they contain, before making an investment decision. If the fund currency is different than the investor’s home currency, changes in the relevant exchange rate can positively or negatively influence the value of the investment and the amount of the costs associated with the fund in the home currency.

We are not permitted to directly or indirectly offer, sell, transfer, or deliver this financial product to natural or legal persons whose place of residence or domicile is located in a country where this is legally prohibited. In this case, we may not provide any product information, either.

Please consult the corresponding information in the fund prospectus and the Information for Investors pursuant to § 21 AIFMG for restrictions on the sale of the fund to American or Russian citizens.

It is expressly noted that this communication does not provide any investment recommendations, but only expresses our current market assessment. Thus, this communication is not a substitute for investment advice, does not take into account the legal regulations aimed at promoting the independence of financial analyses, and is not subject to a prohibition on trading following the distribution of financial analyses.

This document does not represent a sales activity of the Management Company and therefore may not be construed as an offer for the purchase or sale of financial or investment instruments.

Erste Asset Management GmbH is affiliated with the referring Sparkassen banks and Erste Bank.

Please also read the “Information about us and our securities services” published by your bank.

Subject to misprints and errors.

Share post:
Exit mobile version