RegulationMar 13 2023

Experts split on wider impact of SVB's collapse

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Experts split on wider impact of SVB's collapse
Silicon Valley Bank was shut down on Friday (March 10) after failing to raise new capital (Reuters/Dado Ruvic/Illustration)
BySally Hickey

Industry spokespeople were split on whether the collapse of SVB will lead to wider contagion in the financial sector.

Global markets crashed today (March 13) as the collapse of Silicon Valley Bank led to concerns over wider stability in the banking system.

The FTSE100 dropped 2.3 per cent and the Dax 2.8 per cent.

Regional banks in the US were worst hit with Western Alliance Bancorp’s share price tumbling 57.6 per cent, and First Republic Bank dropping 63.6 per cent.

US and UK banks also slid, with Bank of America losing 3.4 per cent and Barclays down 6.6 per cent.

SVB was shut down by US regulators on Friday (March 10) after the bank failed to raise new capital and clients withdrew a quarter of total deposits.

The bank, whose main clients were tech start-ups, was taken over by the US Federal Deposit Insurance Corporation, an independent agency which aims to maintain financial stability and public confidence.

The bank’s UK arm, SVB UK, was bought by HSBC for £1 after talks between the Financial Conduct Authority, Prudential Regulation Authority, Financial Services Compensation Scheme and UK government went on overnight.

SVBUK remains authorised by the PRA and FCA and will operate as normal.

Clients of the bank’s UK arm have been reassured that their deposits are safe.

No imminent crisis

Scott Taylor-Barr, financial adviser at Carl Summers Financial Services highlighted how the City watchdog has tightened up regulations since the 2008 crisis, requiring banks to hold more on their balance sheets.

“[Banks] have to undertake stress tests regularly to prove to the regulator they are financially capable of withstanding massive one-off financial shocks.  

“So in the UK at least, we shouldn't see any banks collapsing, as long as the regulator's rules and the stress testing prove to be robust enough."

The bank’s collapse was idiosyncratic and does not show a system risk to the financial sector, said Daniel Casali, chief investment strategist at Evelyn Partners.

However, for Massimo Preziuso, lecturer in financial technology at the University of Salford Business School, the speed of SVB’s collapse shows the amount of stress the financial markets are under.

“High interest rates…risk bringing light to all the problems driven by too lengthy a period of monetary expansion and ‘cheap money'.

“Many innovative business models are not designed to support this phase easily and it’s likely a period of broader public intervention may well be needed, again.”

Markets are now expecting the US Federal Reserve to leave interest rates unchanged as a result of SVB’s demise.

Mike Riddell, manager of the Allianz Strategic Bond said although this is not the start of a global banking crisis, it shows that interest rates cannot keep rising as things will start to break.