On March 10, Silicon Valley Bank (SVB), the US’ 16th largest bank, collapsed swiftly and sensationally after an unsuccessful attempt to raise fresh capital, which then drove a bank run by its depositors, made up primarily of tech start-ups and venture capitalists. SVB was the largest US bank to fail since the Global Financial Crisis (GFC).
SVB’s USD 212 billion worth of assets was loaded disproportionately with long-term government bonds and asset-backed securities rather than loans, which meant that SVB took a very large (and, it turns out, unhedged) bet that interest rates will stay low. The bet went badly when the value of their bond holdings crashed after the Fed raised policy rates, the fastest in four decades, to fight inflation.
Concerns of a wider-spread contagion gripped global markets, with the fall of SVB sparking comparisons to the collapse of Lehman Brothers in 2008, the precursor to the biggest financial crisis since the Great Depression.
We, however, argue that SVB’s failure is an idiosyncratic stress event, driven by aggressive interest rate risk-taking and the mismanagement of this risk by a large but still niche bank. It’s not a global-level systemic crisis event that would undermine financial systems across the world the way Lehman Brothers did.
Here’s why:
Nevertheless, we believe that there’s no reason to be complacent. We advise against outsized bets in risk assets given the current weakness. While this isn’t 2008, we are mindful that it took several weeks after Lehman Brothers folded before financial markets fully digested the long-term ramifications.
Given the still fragile market psyche against the backdrop of a slowing global economy, we expect more market volatility in the near term and, hence, prefer to remain prudent and defensive.
RUBEN ZAMORA is First Vice-President and Head of Institutional Investors Coverage Division, Financial Markets Sector, at Metrobank, which manages the bank’s relationships with Non-Bank Financial Institutions, including government financial institutions, insurance companies, and asset managers. He is also the bank’s Financial Markets Strategist, focusing on fixed Income and rates advisory for our high-net-worth individuals and institutional clients. He holds a Master’s in Business Administration from the University of Chicago Graduate School of Business. He is also an avid traveler and golfer.
