The US authorities have taken control of the bank specializing in tech in order to avoid widespread panic on the financial markets and a risk of contagion.
It’s a small earthquake in the world of finance. The Silicon Valley Bank (SVB) was closed on Friday March 10 by the American authorities. Little known to the general public, SVB had specialized in the financing of start-ups and had become the 16th American bank by the size of its assets. At the end of 2022, it had $209 billion in assets and about $175.4 billion in deposits. This is the biggest bank failure in the United States since the financial crisis of 2008. The news has shaken the financial markets, even if the experts try to be reassuring for the moment.
What caused this fall?
Silicon Valley Bank is a bank whose clients are mainly “tech” players. “These companies were doing pretty well, they had a lot of cash that they were depositing in the bank. SVB was using that cash to buy US Treasuries”, explains Philippe Waechter, director of economic research at Ostrum Asset Management, on franceinfo. But a few weeks ago, the tech sector started to experience some difficulties. “Companies wanted to recover part of this cash. And the bank was obliged to sell part of the accumulated portfolio.”
Except that with the rise in interest rates, the bank has accumulated losses. Quickly, the establishment was no longer able to cope with the massive withdrawals of its customers and its last attempts to raise money were unsuccessful. “There was a question of trust vis-à-vis this bank”summarizes Philippe Waechter.
“Her clients said to themselves, ‘If she can’t raise funds, is she strong enough?’ Hence this banking panic.
Philippe Waechter, director of economic research at Ostrum Asset Managementon franceinfo
Outside the bank’s headquarters in Santa Clara, Calif., a few nervous customers were still wondering Friday how they could access their funds. On the storefront, a message explained that it would be possible, from Monday, to withdraw up to 250,000 dollars. “It’s not good. Many of the greatest [sociétés de capital-risque] have very high deposits here”told AFP a client, boss of a start-up, who used the bank to pay his employees.
What are the consequences ?
On the markets, the panic movement began on Thursday, when the SVB revealed that it was trying to raise capital quickly to deal with the massive withdrawals of its customers, without succeeding. The announcement surprised investors and rekindled fears about the soundness of the banking sector as a whole, particularly with the rapid rise in interest rates which is driving up the cost of credit.
The four largest US banks lost $52 billion on the stock market on Thursday and in their wake Asian and then European banks faltered. In Paris, Société Générale lost 4.49%, BNP Paribas 3.82% and Crédit Agricole 2.48%. Elsewhere in Europe, the German bank Deutsche Bank dropped 7.35%, the British Barclays 4.09% and the Swiss UBS 4.53%.
On Wall Street, the big banks rallied on Friday after the rout the day before. JPMorgan Chase gained 2.54% while Bank of America and Citigroup lost less than 1%. Medium-sized banks, on the other hand, are more in turmoil, First Republic, for example, dropping nearly 15% and Signature Bank, close to the cryptocurrency community, 23%.
How did the American authorities react?
The American authorities took official possession of the bank and entrusted its management to the American agency responsible for guaranteeing deposits (FDIC). US Treasury Secretary Janet Yellen summoned several financial industry regulators on Friday to discuss the situation, reminding them that she had “full confidence” in their ability to take the appropriate measures, and considered that the banking sector remained “resilient”.
“The American authorities reacted very, very quickly compared to what happened before the great financial crisis of 2008”, notes analyst Philippe Waechter. They will now try to reassure American taxpayers: “The objective is to show that this situation is isolated, so the FDIC will manage the bank until things maybe go back to normal”continues Philippe Waechter.
Is there a risk of contagion?
Questioned by AFP, Stephen Innes, analyst at SPI Asset Management, wants to be reassuring, considering that the risk of an incident for the big banks was “weak”. Since the financial crisis of 2008-2009 and the bankruptcy of the American bank Lehman Brothers, institutions have had to give reinforced guarantees of solidity to their national and European regulators. They must, for example, demonstrate a higher minimum level of capital intended to absorb any losses.
For Morgan Stanley analysts, quoted by AFP, “the funding pressures facing the SVB are very unique” and the other banks do not face a “cash shortage”. The opinion is shared by Eric Delannoy, president of the consulting firm Tenzing. “Whenever a bank is in difficulty, there is a fear of contagion. But in this case, it should not be the case because the bank in question is a Silicon Valley bank which financed start-ups. up techexplains this specialist on RFI. It has a limited number of customers and a limited scope of intervention which does not reflect a contagion of the classic customers (…) who are individuals, or even customers of other companies.
“So, we are really on something very localized…”
Eric Delannoy, president of the consulting firm Tenzingat RFI
Philippe Waechter does not anticipate a risk of banks falling by domino effect either, but is a little more cautious. “He must be kept in mind, however, that many banks have bought US Treasury bonds and that, like Silicon Valley Bank, the interest rates on these bonds have gone up, so the value of these portfolios has gone downdetails the expert. If indeed, there was a slightly more generalized panic, these banks would be in difficulty, because they would face losses on their portfolio, hence the responsiveness of the authorities to avoid a spread to other banks.