Is SVB’s collapse a sign of things to come?

It was the bank most people had never heard of, but Silicon Valley Bank (SVB) will be remembered forever after it became the second largest to collapse since Lehman Brothers in 2008.

As with Lehman, few saw it coming but they probably should have since plenty of red flags were raised last year.

SVB invested deposits in interest rate sensitive bonds when rates were low. As rates increased, these bonds incurred mark-to-market losses, which means value was adjusted to reflect current market conditions.

This would have been fine if the bonds had been held to maturity but they were available for sale so, as become painfully obvious, it wasn’t fine.

Second warning lay in SVB’s target market; early-stage technology businesses, many of which were non-profitable and cash starved as fundraising had dried up following rises in interest rates.

Shortly after SVB imploded, Signature Bank – a crypto specialist - followed suit, leaving investors asking if the whole house of cards is about to tumble down yet again.

Jack Byerley, deputy chief investment officer at WH Ireland, believes not, observing: "These were banks with very specific investors, those in venture-capital backed technology and crypto start-ups, and ones that benefited from a surge in deposits during the boom years of 2018-2021. It is almost always the case that stress emerges in the financial system most prominently in the parts of the market where excesses are prevalent, and this has once again held true."

Intervention from the Treasury and Federal Reserve was swift and effective in providing a backstop for all deposits, including those in excess of the USD250k Federal Deposit Insurance Corporation limit.

Chris Crawford, portfolio manager of Eric Sturdza Investments strategic long short fund, says: "The risk of a cascading crisis of confidence was too great, particularly in the age of social media which was not as influential during the 2008 crisis. [the central banks’] goal is to demonstrate that depositors will be made unequivocally whole in these early highly-stressed cases to prevent runs on the broader group of remaining banks, even those that do appear to be sufficiently capitalised for the markdowns."

However, there are commentators who are not convinced the financial sector is home and dry.

David Dowsett, global head of investments at GAM Investments, says that while much of SVB’s demise was of its own making, and that other banks largely do not share the same exposures, he adds: "Banking crises have a habit of beginning with one bank and extending to others, so we need to pay close attention.

Returning to more positive financial news, this week IAM talked to Ravi Anand, managing director at ThinCats, which has recently overtaken HSBC as the number one lender to SME businesses.

While the wider M&A world suffered during 2022, Anand says lending volumes are up in the B2B sectors to which they lend, and since ThinCats is willing to lend to businesses typically overlooked by traditional banks, it’s been a successful 12 months.

Looking to the next year he says the economic headwinds of rising inflation and interest rates are not an issue and he expects to keep outpacing the big banks.

Institutional Asset Manager’s sister title, ETF Express, is collaborating with IMpower FundForum, Europe’s largest asset and wealth management event, on its ETF sessions this summer in Monte Carlo.

To view the current agenda please click here. 

Delegates can receive a 10 per cent discount using this code FKN3253EMSPK, following this link and asset managers can receive a further 50 per cent discount.

ETF Express has also launched its new podcast series, Off the Record, in partnership with Truss Edge, providers of front, middle and back-office software and services to ETF issuers. Listen to the first outing which features ETF analysts Detleff Glow from Refinitiv Lipper and Athanasios Psarofagis from Bloomberg Intelligence discussing with ETF Express managing editor Beverly Chandler the growth of European ETFs.

To listen to the podcast please click here.

If you would like to be involved in the planned Institutional Asset Manager podcasts, please contact Beverly Chandler at Beverly.chandler@chandlerpublishing.com

Gill Wadsworth, Editor