Will the US be more vulnerable to the SVB fallout in the future?
The collapse of Silicon Valley Bank (SVB) and Signature Bank last week has exposed the vulnerabilities of the US banking system and raised the possibility of more incidents like SVB in the future, experts warn. The two banks, which specialized in lending to tech firms and startups, failed after suffering huge losses from their bond portfolios amid rising interest rates and a run on deposits. The US authorities had to intervene to guarantee all deposits and provide emergency loans to other banks and financial institutions to prevent a systemic crisis.
However, some analysts and investors fear that the government’s actions may not be enough to restore confidence and stability in the banking sector, which could face more challenges and shocks in the coming months. Some of the factors that could trigger more incidents like SVB are:
Rising interest rates and inflation:
The Federal Reserve has been hiking interest rates to combat inflation, which has eroded the value of many bonds and treasuries that banks hold as assets. Higher interest rates also increase the cost of borrowing and servicing debt for banks and their customers, especially those in high-risk sectors like tech. Moreover, higher interest rates could dampen economic growth and consumer spending, which could affect banks’ revenues and profits.
Moral hazard and market discipline:
By guaranteeing all deposits at SVB and Signature Bank, regardless of size, the government may have created a moral hazard problem, where banks and depositors have less incentive to monitor risks and act prudently. This could encourage excessive risk-taking and leverage in the future, especially by banks that cater to high-risk sectors like tech. Moreover, by providing emergency loans to other banks and financial institutions, the government may have reduced market discipline and distorted market signals. This could create an expectation of future bailouts and subsidies, which could undermine financial stability and efficiency.
Regulatory gaps and oversight:
The bank failures have also exposed some regulatory gaps and oversight issues in the US banking system, which could allow more incidents like SVB to happen. For instance, SVB was able to accumulate a large amount of uninsured deposits, which made it vulnerable to a run on deposits. Moreover, SVB was able to sell $21 billion in bonds at a loss without disclosing it to regulators or investors until it was too late. Furthermore, SVB was able to downplay its risks and losses until its collapse, despite being under scrutiny by regulators.
Contagion and spillover effects:
The bank failures could also have contagion and spillover effects on other sectors and markets, as well as on consumer confidence and spending. For instance, some of SVB’s clients include large corporations like Netflix, Airbnb and Stripe, which could face disruptions in their operations or cash flows due to their exposure to SVB. Moreover, some of SVB’s bondholders include pension funds, mutual funds and insurance companies, which could suffer losses or liquidity problems due to their exposure to SVB. Furthermore, some of SVB’s counterparties include other banks and financial institutions, which could face contagion risks or solvency issues due to their exposure to SVB. Additionally, some of SVB’s depositors include individuals and businesses, which could face uncertainty or hardship due to their exposure to SVB.
In conclusion, the collapse of SVB and Signature Bank has been a major shock for the US banking system, which has prompted swift and decisive action from the government authorities. However, it also poses significant challenges and risks for the future, which will require careful monitoring and regulation.