Analysis | The bankruptcy of SVB: will the crisis of 2008 repeat itself?
At the end of last week and the beginning of the current, financial markets were shocked by the news of the bankruptcy of Silicon Valley Bank (SVB). The event triggered a sell-off and led to declines in stock indexes. In the US, bank stocks suffered significant losses, with some smaller regional banks down 60-70%.
SVB is an American bank that specializes in lending to technology startups. The bank was in 16th place in size, with assets of about 250 billion dollars.
What caused Silicon Valley Bank to fail?
At the heart of the events is the policy of the US Federal Reserve to control inflation in the country by raising the main interest rates. The accelerating tightening of lending conditions has provoked a number of start-up companies to withdraw funds from the bank in recent months.
This forced SVB to sell $21 billion of bonds from its portfolio on Wednesday, March 8. The bonds were sold at a lower price because their yields were below average. As a result, the bank admitted that it lost $1.8 billion.
There followed mass withdrawals by the bank's customers and another unsuccessful attempt to raise capital. On Friday, regulators took control of the institution.
How did the markets react?
SVB lost 60% of its value and was the biggest loser in the S&P500 index. But the news of the bank's bankruptcy “infected“ rapidly the entire US banking sector. It carried over to Europe, where the financial sector in Germany, France, Italy and Britain suffered collapses. The wave reached Japan, where banking stocks lost between 7 and 8%.
Oil also became subject to sales. The WTI variety fell by about 7.5% within several trading sessions.
Part of the free money went to precious metals. Gold and silver responded with gains as fears of SVB's problems spreading to other banks and sectors sent investors fleeing to safe-haven assets.
What are the expectations for the upcoming weeks?
According to market experts, the risks of growing fears are minimal at the moment, since the regulators have already announced that depositors' deposits in SVB will be paid up to the amount guaranteed by law. But expectations are that market volatility will remain higher than usual.
Shocks in the banking system can scare off lenders, consumers and businesses, slowing the economy, but for now we're talking more about an isolated event that's likely to be contained relatively quickly and won't have the power to trigger a larger crisis .
Next week, on March 22, the Federal Reserve's two-day meeting will conclude, with expectations now that the US central bank will raise interest rates by 0.25%, instead of 0.50% as expected before the SVB bankruptcy. If that happens, markets are likely to get over the current shock more quickly.
Fed Chairman Jerome Powell's statement on the bank's failure, as well as future rate hikes, will be closely watched by investors. However, any surprise or deviation from expectations would be a test of investor emotions and would increase the already high level of volatility.
What do BenchMark customers expect?
BenchMark's market sentiment chart, which reflects short-term sentiment among clients, shows that despite the turmoil, 68% expect a short-term rise in the US's leading S&P500 index, while 32% believe there will be further declines.
The data is based on the actual number of concluded transactions in BenchMark's MetaTrader platform as of 3:00 p.m. on 03/15/2023
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