#Market Strategy — 14.03.2023

Should Investors Fear the Aftermath of the Collapse of the Silicon Valley Bank?

Alain Gérard, MSc, MBA Senior Investment Adviser, Equities BNP Paribas Wealth Management


Market context

A sharp fall in the banking sector and in equity  markets followed the announcement of a  recapitalisation of Silicon Valley Bank (SVB), a  regional bank in California. On the evening of  Thursday 9 March, the S&P 500 Index fell by 1.8%  on the news, with the S&P 500 Banks Index  shedding 6.6%. The European session opened  sharply in the red on Friday (at around -2%)  before picking up slightly. On Monday morning,  European stock exchanges fell by around 3%.

What happened?

Silicon Valley Bank specialises in lending to start-ups  and young technology companies. This high-risk  business has become even riskier since rates started  to rise a year ago.

Its business model is causing a continual fall in cash  as the companies it partners with are using their  cash. In order to face cash withdrawals, SVB  recently disposed of part of its fixed income  investments, at a loss, thus putting a strain on its  capital. In a bid to shore up its finances and  guarantee long-term solvency, SVB had decided to  increase its capital by USD 2.25 billion by issuing  new shares.

On this news, the stock plummeted 60%, and the  entire US banking system was shaken in the markets.  Obviously, this raises questions about the liquidity of  the banking system in general and potential  contagion risks. During the weekend (11-12 March),  the American regulator finally decided to take control  of SVB by guaranteeing customer deposits and  allowing cash withdrawals. The bank is opening  today (Monday) even though the share has been  suspended on the stock market.

Should investors fear contagion to  the US banking system?

Not really. Generally speaking, major US banks have very  healthy liquidity positions and therefore do not  need to sell bonds to guarantee their liquidity. SVB  is a singular case and its woes are due to its  particularly poor cash and balance sheet  management (especially in view of its business  model and customer-base).

In general, there has been a liquidity squeeze in the  US banking system, but this came on the back of a  huge increase in deposits following the cheques the  US administration had sent to American  households during the COVID-19 crisis as an  economic stimulus measure.

The balance sheets of major American banks are  healthy. However, a few small US regional banks  may have mismanaged their balance sheets, which  would not be statistically unusual given the large  number of US regional banks. In fact, it appears  that some other small financial institutions in  California are suffering from deposit outflows. This  is not surprising given the context.

Overall, credit default swaps (CDS) of American  banks have widened around 30-40bp. In addition we are still some way  off the peaks reached in October during the crisis surrounding the restructuring of Credit Suisse.

Credit spreads of quality issuers have increased  by around 0.1% and those of lower quality by  around 0.5%. In other words, very little. Large  US banks could even benefit from the situation  if customers were to move their deposits from  beleaguered banks.

Should investors fear contagion to  the European banking system?

This scenario is even less likely. In general, CDS of  European banks have barely widened. They have  generally NOT increased their bond allocations in  recent years and their balance sheets are  suffering relatively less from rising bond yields.  On the contrary, their now very strong balance  sheets allow them to lend again under more favourable terms than they had offered for many  years, while their own financing, mainly via  customer deposits, remains very cheap.

Moreover, few European banks specialise in niches like Silicon Valley Bank. European banks are usually more diversified and well regulated.

Other consequences

Paradoxically, this crisis could prove positive for equity markets if, for example, the American Federal Reserve were to temper its monetary tightening policy to boost liquidity and market confidence.

This event highlights the risks of investing in smaller companies that are not always transparent or well managed. The short-term impact could therefore be a return of investor appetite to quality companies with solid balance sheets and sufficient cash, after the early 2023 trend of a new appetite for risk and for lower-quality companies.

More illiquid and risky investments, on the other  hand, should see their risk premiums increase.  During the weekend (11-12 March), after the US  regulator took control of SVB, we learned that it  was setting up a liquidity/refinancing mechanism  for banks in difficulty: eligible institutions will be  able to obtain liquidity (in the form of loans of up to  one year) against bonds in portfolio at a valuation  level of 100%, and not at market value.


The rapid decisions of support made by the US authorities to ensure liquidity and stem a systemic panic movement are a step in the right direction.

We expect this event to remain relatively under control. We will be monitoring the developments over the coming days and weeks, notably to see if we need to change our Positive opinion on the  banking sector (which is undervalued despite seeing an explosion in profits due to an  unprecedented increase in net interest margin).

For the time being, we still prefer European banks to US banks.