Markets take heart from the swift reaction to SVB

The imminent collapse of a Bank not many people had heard of outside of financial circles caused shock waves through capital markets on Friday. SVB bank is something like the 15th largest bank by deposits, used by many tech startups to bank, as well as venture capitalists. What has led to the growth of SVB bank? Anyone trying to start a business and get the support of traditional banks found it very hard, almost impossible, and many turned to SVB. The potential collapse of SVB will have serious implications for many small businesses looking to grow will now face the risk of failing. As well as that future start-ups may now find access to capital harder.

The downfall of SVB, as is often the case is a consequence of the Federal Reserve’s actions tightening monetary policy. SVB’s board decided to put the bulk of their money into longer-dated MBS, leading to a mismatch of assets and liabilities. Rising interest rates in 2022 led to heavy falls in bond markets, and SVB’s bond portfolio fell sharply. Banks do not record losses in bonds unless they have to sell them, as it is assumed if held to maturity, those losses will be recouped; this was the assumption for SVB. On Wednesday, a move to sell 21 billion dollars of bonds at a loss and to raise 2.25 billion in capital led to a good old-fashioned run on the bank. The banking sector fell as investors feared what is the risk of contagion in the financial system.

The Federal Reserve and the FDIC, who took control of the bank on Friday, have been working to ensure insured depositors have access to their funds on Monday. It is important the regulators reassure the financial system to reassure confidence. Banks work on confidence, and regulators are acutely aware of this. SVB serves as an important part of the investment community. Stocks on Monday appear to have taken heart from the reaction of regulators over the weekend as stocks in Europe and the US are opening higher on Monday.

What could be the implications for stock and bond markets? Initially, there will be a flight to safety and a move away from stocks, we saw this on Friday and depending on the news over the coming days, it may continue. Falling stock markets are one of the quickest ways to get inflation rates down; we saw this in 2008, as wealth is rapidly destroyed; as a consequence, the Federal Reserve may now have to rethink its monetary policy, which may explain part of the reason the USD fell on Friday. Sentiment indicators moved into fear territory as a result of the events of the past few days; longer term, the events of the past few days may provide a more positive outlook for stocks. Goldman Sachs now predict the Fed will leave interest rates unchanged at their next meeting.

We may get some insight into the thoughts of the central bankers; on Thursday, the ECB meet to announce their latest rate decision. Janet Yellen also appears before the Senate Finance Committee, when no doubt she will be questioned on SVB and why no regulator saw fit to question the strength of the balance sheet at SVB. Before SVB, this week’s focus would likely be Tuesday’s US inflation report, where analysts forecast another fall. The other major event this week will be the UK budget on Wednesday.