Following recent events in the US banking sector, please find a brief client overview below.
Key points
- US regional banks, Silicon Valley Bank (SVB) and Signature Bank collapse unexpectedly, sending shockwaves through markets reminiscent of the Global Financial Crisis.
- Regulators with the approval of US president Joe Biden, step in with emergency provisions to restore confidence in the financial system and to protect depositors’ money.
- Fears of contagion risk appear to have been successfully mitigated for now.
Background
Last Friday, little known US regional bank and lender to tech start-ups, Silicon Valley Bank and Signature Bank, became global headlines after sensationally collapsing, forcing US regulators to shut them down.
The catalyst for the colossal fall from grace in the first instance was an announcement from SVB Financial Group of a $2.25 billion share sale as an attempt to shore up capital to cover $1.8 billion in losses on a $21 billion portfolio of securities. Investors greeted the news by voting with their feet, withdrawing their money en masse, forcing SVB to sell long duration securities at a considerable loss to meet the urgent liquidity needs of their customers.
In scenes reminiscent of the Global Financial Crisis, the dramatic implosion of SVB caused its share price to plunge over -60%. This in turn, triggered a sharp US equity sell-off, which saw the S&P500 lose -1.8% and S&P Bank stocks drop -6.6%. Global bond yields also collapsed as investors fled to safety. The yield on US 10-year Treasuries fell by a cumulative 30bps in the last two days of the week, while the 2-year yield dropped by 48bps.
Sensing the market fear that the collapse of two regional banks may extend to other banks and cause a major liquidity event, US regulators quickly intervened, by shutting down the troubled banks. Regulators then set in motion emergency provisions to protect the uninsured deposits of the Banks’ customers to stabilise and restore confidence in the financial system.
Fortunately, the quick actions of the Federal Reserve to safeguard depositors’ savings appears to have had the desired effect in restoring market confidence and preventing a localised issue, morphing into something a lot worse and widespread.
Investment implications
Whilst the collapse of both SVP and Signature Bank is disconcerting news for markets and direct investors, we consider it to be an isolated event at this stage. That said, it serves as a clear reminder that central banks rapid policy tightening over the past 12 months is now starting to be felt more broadly and has finally caught up with the banking sector which have up until recently enjoyed healthy net interest margins.
While the Fed’s timely intervention to backstop all uninsured deposits and the creation of the ‘Bank Term Funding Program’ to provide liquidity should help prevent any further bank ‘runs’, we think it does little to change the bigger picture of slowing, broad based earnings growth that is already upon us. Given this expectation, we remain cautious on equities for the time being as markets digest the lagged impact of aggressive monetary policy and speculate as to whether central banks may adopt a less aggressive policy stance from here given the cracks that are starting to emerge in the US banking system.
Note the situation is extremely fluid and we will continue to closely monitor developments.
