13 MAR 2023

What to make of the "SVB story"

News and insights

Edina Rozinka, our Financials Credit PM briefly reflects on the "SVB story" and the related market volatility.

What is SVB and why it is relevant for the markets?

SVB (Silicon Valley Bank) is a niche VC/tech focused commercial bank based in California. While it was a lesser known, relatively small bank in the USA (N16 in the USA with some international operations), its collapse created significant market volatility. The company was unsuccessful to raise capital last week, following the announcement of around USD 2bn loss as a result of the sale of a AFS (available for sale) portfolio of securities (which included Treasuries and mortgage-backed securities), in response to the decrease in its customer deposits. Given SVB’s business profile, its depositor base was not diversified, and the bank saw over USD 40bn of deposits withdrawn last Thursday (i.e., almost ¼ of its deposit base). The story created panic waves, sending European bank stocks significantly lower and bonds materially wider last Thursday and Friday.

Market Tone and Implications / Read across for European Financial Bonds?

SVB collapsed last Friday, with the US authorities announcing that it was entering FDIC (Federal Deposit Insurance Corp) receivership. The company’s UK operation was not put into UK insolvency procedure, as was sold to HSBC (for GBP 1) on 13 March 2023. While SVB assets in the US are also expected to be sold, in the meantime the US Treasury, FED and the FDIC jointly announced an emergency backstop, with confirming that fully protects all depositors of SVB. The FED announced a new “Bank Term Funding Program” as well that offers 1yr loans to banks under easier terms than it typically provides and it is relaxing terms for lending through its discount window, its main direct lending facility (i.e., HQLAs are allowed as collateral at 100% face value, eliminating a bank’s need to quickly sell securities in times of stress). While this is supportive for financial stability in general, markets have appeared to remain nervous about the potential other bank failures and bail-ins.

It is important to note that SVB was a niche player compared to the well-diversified European banks with strong fundamentals, sticky deposits, and better matched assets with durations. We also emphasize that in contrast with equities, not all bonds facing bail-in risk (i.e., expect Preferred senior bonds to outperform the rest of the capital structure in this sell-off). We view the moves on European insurers as especially overdone, considering that their business profile makes very difficult to see massive withdrawals (i.e., cannot experience similar deposit run, liquidity issues compared to banks). Finally, apart from the credit risk component, we believe that it is important to consider the rate aspects for valuations as well and we view the upcoming rate hike decisions from Central banks as key.

For further views, please do not hesitate to contact Edina at edina.rozinka@capecapital.com, or Michael Lienhard (Head of Fixed Income) at michael.lienhard@capecapital.com

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