The collapse of SVB: a shot in the knee, but not a systemic risk

It’s Wednesday night Silicon Valley Bank, which financed mainly smaller and medium size US (bio)tech companies, announced that it wants to because of losses that were largely due to the excessive exposure to US Treasury bills (these were bought at high prices during the period of low interest rates), recapitalize with 2.25 billion dollars. It was a shot in the knee as the news triggered an unsuspected panic. Customers SVBstarted massively raising their deposits (up to Thursday evening by $42 billion), the bank was within two days insolventthe shares plunged by 60 percent, and on Friday they were traded (and and some related banks) stopped. On Thursday, logically, the entire banking sector went down sharply, but it is still worth emphasizing that the shares of banks JPMorgan, Wells Fargo and Citigroup managed to maintain its value on Friday.

Higher interest rates expose risky businessesCalifornia banking regulators are the bank SVB closed with 6,500 employees and took control of SVB-‘s deposits (totaling $175 billion). It is the biggest failure of any American bank after the Bank of Washington Mutual in September 2008, which happened just a week after the California bank turmoil Silvergate Capital, which lends money mainly to companies in crypto industries. She is afraid of the effect dominos and could we expect any more serious problems in the financial sector? Very likely not, as the mentioned banks had a specific business model and focused mainly on a specific sector. The largest banks are more diversified and they must also meet stricter capital requirements.

Bitcoin slipped below 20 thousand dollarsIn any case, the story is another proof of how the environment is right suddenly changed and how, with such a significant increase in interest rates in the last year, some companies they are not able to survive. Just remember how the Bank of England had to intervene in October to save domestic pension funds that manage liquidity with the LDS strategy (liability–driven investments), which works perfectly in an environment of extremely low interest rates, but then it turned out to be a rather risky practice. List of companies that are “stranded” in the bank Silicon Valley, is debt, it is among them (with 3.3 billion dollars). Circle, which is behind the stablecoin USD Coin. Its value was visibly separated from the 1:1 ratio with the dollar yesterday and slipped to a record low, all the way down to $0.87, and this also affected bitcoin, which looked below $20,000. Circle then returned the confidence with some reassuring words, so that on Sunday morning the value of USD Coin was $0.97.

Biggest weekly losses in New York since JuneThe Dow Jones slipped for the fourth time in a row on Friday, losing 4.44 percent for the week as a whole, right it marks the worst weekly performance since June. So does the S&P 500 and The Nasdaq fell by almost five percent. The storm created by the collapse of the bank SVB, was overshadowed by a fresh report on the US labor market, which was favorable for investors as there were some signs that inflation was easing. The growth of the hourly rate was lower than expected (4.6 percent on an annual basis), and the unemployment rate rose slightly more than expected (to 3.6 percent). However, there are still very telling developments in the bond markets. The yield of the American two-year bond reached almost 5.1 percent in the middle of the week (the highest since June 2007), while the yield of the 10-year bond decreased, so that the difference between the two mentioned papers was already around 110 basis points, right is the highest since 1981. It is a strong recession signal.

The effect of the reduction in energy prices on inflation will be canceled out by empty state coffersHow much more the Fed will raise interest rates is still a hot topic in the financial markets. On March 22, he could well decide to raise the rate by 50 basis points. “Core inflation is still quite high, fueled by services to a large extent, the effect is also still noticeable post-coronavirus opening of economies,” Aleš Lokar (Generali Investments) told us, who does not see much possibility that the prices of energy products, which are now lower than at this time last year, could have a significant impact on more favorable inflation figures: “Due to high budget deficits, countries will increase taxes or excise duties, right of course, it won’t be exactly anti-inflationary. It is becoming increasingly clear that inflation has indeed come down from the record levels of the last 40 years, but in the face of wage pressures, it still remains stubborn or sticky (sticky), so central banks will have to raise interest rates.” Will the Fed take risks even with the final six percent interest rate, as pessimists fear? Lokar: “This rating is right rough, the market will hardly bear it.”