Market volatility updates

Our experts’ views on the potential fallout from the US bank’s demise.

Regulators have shut down Silicon Valley Bank (SVB Financial) and taken control of its customer deposits following what’s been called ‘the largest failure of a US bank since 2008’.

While the bank’s collapse has shaken markets and raised questions about the banking sector, the experts at Coutts bank who manage the funds behind NatWest Invest don’t see it causing a substantial shock to the financial system. 

• SVB, the 16th largest bank in the US, had an unusual business model which involved putting a lot of its eggs in one basket – most of its deposits came from companies and start-ups rather than a mix of businesses and households.
• By contrast, larger banks that are more influential to financial market conditions aren’t over-exposed to any one particular area – and they’re under far greater regulatory scrutiny.
• The US authorities acted fast to stop any potential issues from SVB’s collapse spreading, announcing a package of measures that includes all SVB depositors getting their money back.
• SVB’s collapse could lead to America’s central bank, the US Federal Reserve, putting its plans to raise interest rates on hold for now, as markets may need time to fully understand the authorities’ new measures.
• That could actually help the market’s mood as rising interest rates have negatively impacted share and bond price performance over the last 12 months. 
• Since SVB’s collapse, we’ve seen further turbulence and questions around the situation of large banks in Europe. The experts at Coutts think solvency concerns for large banks are exaggerated though. While there will be profitability implications for the banking sector as a whole, large European banks have strong liquidity and are stress tested regularly for scenarios such as rising interest rates.

Rising interest rates, which were actually supporting banking stocks recently, negatively hit SVB because many customers withdrew their deposits. They either needed the cash or wanted to invest it elsewhere to seek higher yields.

This forced SVB to sell some of its own assets, but rising rates had hit their value and the bank had to sell them at a loss.

SVB is not unique in recording losses on such securities. The risk to other banks could be if depositors withdraw their money on a large scale, forcing those banks to sell their assets at a loss too. But the US authorities have sought to address this within their recent package of measures.   

Lilian Chovin, Head of Asset Allocation at Coutts, says: “SVB going under did seem to come from nowhere. It surprised markets, and investors hate surprises, so fears were raised and stocks were sold off.

“But it’s important to put SVB into context. It had an uncommon business model and its over-dependence on one area led to its problems. Also, the authorities’ swift action should help settle the situation and limit any widespread issues.”

Lilian adds, “We’re starting to see the impact of central banks consistently raising interest rates since last year. While SVB’s particular situation is fairly unique in our view, it reveals how weaker companies are getting increasingly challenged by those higher rates.”