All the systemic effects of the Silicon Valley Bank crash
The failure of Silicon Valley Bank is a symptom that the tightening of monetary policies is having an impact on economies. The analysis by Giuseppe Sersale, strategist of Anthilia Capital Partners Sgr.
The failure of Silicon Valley Bank and Signature Bank saw its impact on markets continue on Monday, with massive losses in equities also in Europe (with particular vehemence on the banking sector), and a collapse in yields, which saw curves go discounting much less aggressive rate hike paths, suffice it to say that the US futures strip discounted Fed Funds by less than 4% at the end of the year (from 5.5% in the middle of last week) and the short parts of the curves saw 50 bps, unseen since the Great Recession, or even before.
While the regional banks' deposit guarantee and asset financing measures at par have halted the flight of deposits, the involvement of shareholders and bondholders (right, of course) in the default has hurt sentiment. Furthermore, the failure of SVB and Signature, while not having the characteristics of a systemic event capable of infecting the global banking system, is a symptom that the tightening of monetary policies is having an impact on economies. If the clientele of SVB, Start up Tech and Venture Capital, is more vulnerable, being the victim of a credit crunch, sooner or later the increase in the cost of funding will reach all economic sectors (some, such as real estate, are already accounts).
With regard to banks, although the SVB constitutes a specific case of poor asset management and customer concentration, its story shines a light on the possible negative effects of monetary policy tightening on banking sector fundamentals:
- Growing competition in funding and consequent increase in the cost of funding
- Difficulty in finding sufficiently remunerative jobs (also due to the inversion of the curves)
- Potential for latent losses of varying magnitudes in the bond portfolio due to rapidly rising yields
- Risk of asset deterioration due to the economic slowdown
The impression is that Monday's price action, albeit with the excesses caused by an explosion of volatility in markets, such as the European one, characterized by high sentiment and positioning, has begun to factorize this sort of problem.
Two days ago there was a lull in risk adversion. Evidently the actions of regulators have had a temporary success in calming fears. Attention was then focused on the publication of the February CPI in the US, which substantially confirmed expectations, while showing that the recovery, in particular of inflation on services, is actually slow and full of pauses. In the end, the quarterly growth rate of core inflation, once annualized, is still above 5%, more than double the target.
The result is that stocks and banks have rebounded, and yields have recovered part of the drops of the day before, even if the levels of tightening priced a week ago, i.e. the 5.6% peak of the Fed Funds and the 4% and above of the ECB rate , have remained a pale memory.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/fallimento-silicon-valley-bank-perdite-azionario-europa/ on Fri, 17 Mar 2023 06:26:52 +0000.