SPECIAL REPORT: TEACUP TANTRUM OR COALMINE CANARY?

Collapsing dominos always need a ‘first-mover’, that first domino to get the general collapse going. Is the ordeal of Silicon Valley Bank (SVB), a relatively small publicly-quoted US bank that specialises in lending to tech start-ups, and which lost 60% of its value on Thursday, a teacup tantrum or a coalmine canary? In other words, is SVB’s woe something that will shortly be just a bad memory or does it portend something worse? It would be nice to have a simple yes/no answer but the truth is it’s a bit of both.

On Wednesday this week the parent company of SVB, SVB Financial Group, said it had sold $21 billion of securities (losing roughly $1.8 billion) and wanted to raise $2.25 billion via a share sale. This alarmed venture capitalist investors who reportedly pulled cash out of the bank.

SVB is a banking minnow. At its peak in November 2021 it had a market capitalisation of almost $44 billion. Now it’s scarcely above $6 billion. Why is it in trouble? And why should the difficulties at a relatively small bank cause such ripples in financial markets?

Ripples

SVB was in the happy position of having more funds than companies it thought worthwhile investing in. That meant it had considerable excess funds, the majority of which it invested in long-term, fixed-rate, US government-backed debt securities. Result? Less happiness. For these bonds were bought when rates were low. As the US Federal Reserve seems intent on putting interest rates higher, the value of US government bonds – Treasuries – drops. Combine that with a slow-down in its deposit taking, and SVB was in trouble.

Ripples have been widespread; the four biggest US banks (JPMorgan Chase, Bank of America, Citigroup and Wells Fargo) lost more than $50 billion in market capitalization and shares in Asian and European banks fell sharply. This week another US bank – Silvergate, which had become the biggest cryptocurrency bank in the US – went into liquidation. The issue for both is the rising interest rates, which have left banks laden with low-interest bonds that can’t be sold in a hurry without losses. What’s happened to SVB poses an extra dilemma for the US Federal Reserve, which is still struggling to clamp down on inflation. Should it push up interest rates, the classic way of stemming inflation? Higher interest rates could shove more banks, who collectively are sitting on unrealised losses from government Treasuries estimated to be more than $600 billion, into difficulties.

While the troubles of Silvergate and SVB are unrelated, the problems they have encountered speak to the febrile nature of our banking system. Jittery investors easily take alarm and will pull their investments out of banks at the slightest hint of trouble. For some commentators the SVB debacle is the start of a more general bank run.  Just two weeks back Forbes named SVB as one of the best banks. Although most banks are better capitalised than in 2007 the SVB situation could trigger a global financial crisis. “Silicon Valley Bank is just the tip of the iceberg,” Christopher Whalen, chairman of Whalen Global Advisors, a financial consulting firm, told Bloomberg. “I’m not worried about the big guys but a lot of the small guys are going to take a terrible kicking,” he said. “Many of them will have to raise equity.” This feels like more like a canary than a teacup…

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