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