The collapse of Silicon Valley Bank (SVB Financial) on Thursday (9 March) has rocked markets and raised questions about the banking sector. But SVB’s unusual set-up and some swift action by the authorities means it shouldn’t develop into a deeper problem for investors.

SVB, the 16th largest bank in the US, had a very specific business model. It was not particularly well diversified and most of its deposits came from companies and start-ups rather than a mix of corporates and households.

By contrast, larger, systemically important banks, which are under far greater regulatory scrutiny, don’t have the same concentrated levels of exposure to one area.

Also, the US authorities acted fast to stop any potential contagion from SVB’s collapse. A package of measures has been announced by the US Federal Reserve (Fed), Federal Deposit Insurance Corporation and US Treasury which includes all SVB depositors getting their money back.

Lilian Chovin, Head of Asset Allocation at Coutts, the bank behind the Royal Bank Invest funds, 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 contagion.”

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.”

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 contagion

Lilian Chovin
Head of Asset Allocation, Coutts

US Fed to pause rate hikes?

Before SVB’s collapse, markets had readjusted their expectations around interest rate hikes, predicting that the Fed could raise them more aggressively than initially expected on the back of inflation stubbornly staying high.

But this now looks less certain. The Fed may consider pausing rate hikes this month to let financial markets adjust to the new situation. Markets will need some time to fully understand the US authorities’ new measures and feel comfortable with them.

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. 

What happened with SVB and could it impact the broader banking sector?

Rising interest rates, which actually fuelled a rally in 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 securities to preserve its liquidity. The problem is, rising rates have hit the value of many of those securities, and the bank had to sell them at a loss.

One point that has impacted the wider banking sector is that 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 them to sell their assets at a loss too. But the US authorities have sought to address this issue within their recent package of measures.   

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