The disintegration of Silicon Valley Bank happened in a manner that very few industry watchers could have foreseen.
After a perfect storm of increasingly challenging economic conditions – and a Federal Reserve interest rate hike – the organization’s attempt to raise some fast cash through the sale of its long-term US government bond investments backfired.
Wary of a looming credit emergency, customers were spooked into a mass withdrawal of funds, leading to a run on the bank similar to that which befell Lehman Brothers in 2008.
Naturally, the question on everyone’s mind right now is whether the failure of SIVB will trigger another global recession – or whether this is a disaster that can, ultimately, be contained.
But what will be the short-term impact on the equity markets? And will the calamity restrict itself to just the banking domain?
Initial Market Reaction Positive
Regulators are no doubt sensitive to the high-stakes consequences of the collapse of a major financial institution after the subprime mortgage scandal of the 2000s.
In fact, the authorities have taken rapid action this time, with the FDIC, Treasury, and the Federal Reserve announcing measures that will ensure depositors have full access to “all of their money.”
Moreover, a new Bank Term Funding Program will be established, providing government-backed loans to institutions needing help with any “liquidity pressures that may arise” from Silicon Valley’s demise.
At least for now, these robust interventions seem to have calmed the rising panic on Wall Street. Indeed, while the S&P 500 took a dive under the 4000 mark once news about SIVB’s woes first broke, stock futures have actually risen since.
However, the full implications of this saga have yet to unfold, and it’s still too early to tell which way the wind will blow.
The contagion is already taking hold in some unusual quarters. The USDC stablecoin staged an unprecedented de-pegging from its supposed dollar value at one point over the weekend, as Circle, the company behind the crypto asset, was revealed as having $3.3 billion of its reserves deposited with the Silicon Valley Bank.
But what other firms are suffering? And which others might suffer as things progress?
World’s Best Tech Firms Under Threat
As a bank that crafted its niche in the technology and start-up sector, a wide variety of businesses are exposed to the institution’s bankruptcy.
In fact, several of the most promising and important firms to come out of Santa Clara County in recent years have been affected.
Roku, a highly innovative and pioneering TV streaming company, admitted keeping about 26% – or $487 million – of its cash in the bank’s coffers. Meanwhile, Roblox, a gaming venture, disclosed it had roughly 5% of its $3 billion of cash and securities stored with SIVB, but this was not enough to negatively impact its day-to-day operations.
Finance Sector Getting Crushed
It’s probably unsurprising for such a fast-moving event, but regional banking stocks have been on a roller coaster the last week. Western Alliance Bancorporation fell almost 90% beginning March 8 but recovered massively to rise nearly 300% from its lowest point.
Yet, although WAL is still down 56% from its earlier highs, some companies can’t even boast of that little consolation. Signature Bank – a New York-based crypto-focused outfit – was shut down by regulators on Monday, which – obviously unfortunate for the bank itself – did a lot to ease market sentiment at a vital tipping point in the story.
However, Moody’s downgrading of the entire US banking system is a more worrying concern. That development came despite many regional banks, such as Western Alliance, demonstrating the ability to bounce back strongly, with the credit ratings agency citing a “rapid deterioration” in conditions for American firms.
That said, Moody’s doesn’t believe these failures will result in “more bank runs,” pointing out that the operations that succumbed catered either to the technology or cryptocurrency sectors.
What Are The Wider Effects Of SIVB’s Demise?
It’s a well-known phenomenon that when one high-profile business publicly tanks, it can cause destabilization across the market. This is more true when the business in question is deeply connected to other enterprises outside of its immediate vicinity, thus making the risk of a full-scale contagion all the more real.
Likewise, when a financial institution fails – such as SVB – the sense of systemic risk is heightened. Debts that go unpaid from one organization will almost always impact others, causing a domino effect of defaults for those ventures caught up in the ever-spreading chain reaction of losses.
Furthermore, when a hitherto successful company folds out of the blue, it also takes a tremendous toll on investor confidence.
Indeed, for all intents and purposes, SIVB was a great business with many opportunities for growth. For example, the firm’s revenue more than tripled over the last five years, with the company exclaiming in its fourth-quarter earnings literature that its core fee income for fiscal 2022 had increased 57% to $1.2 billion.
Therefore, when potential shareholders decide to take a position in some other type of stock, they’ll probably think twice before taking the plunge. This doesn’t just precipitate an environment that can lead to a liquidity crisis; it can, in the worst case, see a market-wide sell-off across every industry imaginable.
Hence, it’s unclear just where the fall of Silicon Valley Bank will take us. The effect is global even today, with efforts in the UK underway to protect its “most strategic companies.”
But if history has one lesson, it’s that nothing about this catastrophe will be predictable.
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