People line up outside of the shuttered Silicon Valley Bank (SVB) headquarters on March 10, 2023 in Santa Clara, California.
People line up outside the shuttered Silicon Valley Bank (SVB) headquarters in Santa Clara, California. Image Credit: AFP

US regulators continued damage control, European authorities assured their exposure was limited, bank stocks crashed and gold once again proved a safe haven, all in a day as the collapse of Silicon Valley Bank sent tremors across the global financial system.

Earlier, the US Treasury and Federal Reserve announced a range of measures to stabilise the banking system and said depositors at SVB would have access to their deposits.

The moves came as authorities took possession of New York-based Signature Bank as well, the second bank failure in a matter of days.

US officials said depositors of New York’s Signature Bank, which was closed on Sunday by the New York state financial regulator, would also be made whole at no loss to the taxpayer.

Signature, like SVB, had a clientele concentrated in the tech sector, and the securities on its balance sheet had eroded as interest rates rose.

Meanwhile, the Federal Deposit Insurance Corporation named Tim Mayopoulos as the CEO of SVB. The regulator has also transferred all deposits “both insured and uninsured” and substantially all assets of the bank to a newly created bridge bank.

Stocks plunge

First Republic Bank
First Republic Bank dropped 61.3 per cent in premarket trading on Monday. Image Credit: Bloomberg

Global banking shares plunged on Monday as moves by the US to guarantee deposits at SVB failed to reassure investors.

Europe’s STOXX banking index fell 5.8 per cent, having shed 3.78 per cent on Friday, leaving it on track for its biggest two-day fall since March 2022.

Commerzbank AG fell as much as 12.7 per cent, while Credit Suisse Group AG briefly hit a new record low after falling more than 15 per cent.

US banks also declined in pre-market trading, with Bank of America down 3.7 per cent. First Republic Bank dropped 61.3 per cent in premarket trading, while Western Alliance Bancorp and PacWest Bancorp fell 63.9 per cent and 42.7 per cent, respectively.

“There is a sense of contagion and where we see a repricing around financials is leading to a repricing across markets,” said Mark Dowding, chief investment officer, BlueBay Asset Management in London. He said he did not think that a lot of the issues impacting US banks would be manifested in European peers.

Bonds held by SVB were “worth next to nothing in a short space of time, so against that backdrop, that has an effect that is translated on a more widespread basis”, he added.

US banks lost over $100 billion in stock market value late last week following SVB’s failure, while European banks have now lost a similar amount, according to a Reuters calculation.

Hopes up for lower rate hike

Stock - Federal Reserve / Jerome Powell
All eyes will now be on the Fed when it announces its latest policy rate next week. Image Credit: Reuters

Meanwhile, a furious race to re-price interest rate expectations also sent waves through markets as investors bet the Fed will be reluctant to hike next week while the mood is febrile and delicate.

Two-year US Treasury yields were last down 30 bps point at around 4.27 per cent and were set for their biggest three-day slide since 1987, down a total of 80 bps.

“It looks like the 50 basis point move is very likely to be off the cards altogether given the negative economic impact and the effect on sentiment from the SVB fallout,” said Victoria Scholar, head of investment at Interactive investor.

“The Fed could even potentially opt for no change to interest rates whatsoever as the central bank keeps a close eye on the risk of any contagion effects from SVB’s collapse.”

Gold surges

Gold, meanwhile, raced towards the key $1,900 level on Monday, emboldened by bets that the Fed may have to tone down its rate hikes. Spot gold was up 1.6 per cent at $1,897.31 per ounce, as of 1237 GMT (4.37pm UAE time), the highest price since early February. US gold futures gained 1.7 per cent to $1,898.10.

“Recent events show that gold remains a safe-haven asset as it is able to benefit from market uncertainty. Also, market participants pricing out rate hike expectations is lifting gold,” UBS analyst Giovanni Staunovo said.

Lower interest rates decrease the opportunity cost of holding zero-yield gold.

Gold’s gain indicates some institutional money came into the market, but it’s not certain that this trend will be seen in exchange-traded funds (ETFs), said Philip Newman of Metals Focus.

New safeguards

US regulators announced a new facility to give banks access to emergency funds. The Fed also made it easier for banks to borrow from it in emergencies.

The Biden administration’s intervention underscores how a relentless campaign by the Fed and other major central banks to beat back inflation is putting stress in the financial system and global markets.

“The firms are not being bailed out. The depositors are being protected,” a senior US Treasury official said.

White knight

Jeremy Hunt says HSBC stepping in to buy the regional arm of SVB should assure UK investors. Image Credit: Shutterstock

In the UK, HSBC bought the regional arm of SVB for a symbolic one pound on Monday.

The deal, which sees one of the world’s biggest banks, with $2.9 trillion of assets, take the doomed British arm of the tech lender under its wing, brought to an end frantic weekend talks between the government, regulators, and prospective buyers.

“HSBC is Europe’s largest bank, and SVB UK customers should feel reassured by the strength, safety and security that brings them,” Britain’s finance minister Jeremy Hunt said.

“We were faced with a situation where we could have seen some of our most important companies - our most strategic companies - wiped out, and that would have been extremely dangerous,” Hunt told reporters.

Asked about HSBC’s white-knight role, Hunt said his priority had been to avoid using British taxpayers’ money.

SVB UK has loans of around 5.5 billion pounds and deposits of around 6.7 billion pounds, HSBC said, adding the takeover completes immediately.

“This acquisition makes excellent strategic sense for our business in the UK,” HSBC CEO Noel Quinn said in a statement.

Europe keeps a close watch

Meanwhile, French finance minister Bruno Le Maire said the collapse of SVB posed no risk to the French banking system.

“We are monitoring the situation in the US but there is no specific alert on the French banking system, which is solid,” he told franceinfo radio.

Norway’s sovereign wealth fund also said it was “closely monitoring the situation in the market”.

“We expect to get some money back on our credit exposure,” the fund said in a statement.

Swedish authorities, meanwhile, gave assurances that SVB’s collapse is unlikely to impact the country’ financial stability.

The Financial Supervisory Authority (FI) said in a statement it was in close contact with Swedish insurers and pension providers to get a better understanding of their exposure to troubled US banks.

“FI is also in contact with the major Swedish banks. Our assessment is that none of them have any large direct exposure of their own to the U.S. banks that have run into problems,” it said.

“We see some drama and turbulence in the US banking market. Our assessment is, however, that the stability of the Swedish financial system is not affected by this, as it has significant resilience,” acting FI Director-General Susanna Grufman said.

How things went wrong

SVB, a mainstay for the startup economy, was a product of the decades-long era of cheap money, with unique risks that made it especially vulnerable.

It became the biggest US lender to fail in more than a decade after a tumultuous week that saw an unsuccessful attempt to raise capital and a cash exodus from the tech startups that had fueled the lender’s rise.

Regulators stepped in and seized it on Friday in a stunning downfall for a lender that had quadrupled in size over the past five years and was valued at more than $40 billion as recently as last year.

SVB is the second regional lender to fold this week after Silvergate Capital Corp. announced it was voluntarily liquidating its bank.

The firms suffered amid the downturn for the technology and crypto startup world over the past several months.

“Bank runs are a lot about psychology. And at this point, it’s very rational to be nervous,” said Saule Omarova, a law professor at Cornell University.

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Tech investor Peter Thiel. Image Credit: Bloomberg

Problems for SVB mounted after Peter Thiel’s Founders Fund and other high-profile venture capital firms advised their portfolio companies to pull money from the bank. The calls followed parent company SVB Financial Group announcing that it would try to raise more than $2 billion after a significant loss on its portfolio.

In announcing the takeover, the California Department of Financial Protection and Innovation cited inadequate liquidity and insolvency.

Receivership typically means a bank’s deposits will be assumed by another, healthy bank or the FDIC will pay depositors up to the insured limit.

“The FDIC receivership will end the uncertainty about this particular bank,” Omarova said. “But I don’t think that necessarily itself stops people from feeling less safe if they have some kind of exposure to assets or they hold their own money in banks with similar risk profiles.”

SVB was founded in 1983 over a card game between Bill Biggerstaff and Robert Medearis, according to a statement from the bank’s 20th anniversary. Since its start, the firm has specialised in providing financial services to tech startups.

The bank had about $209 billion in total assets and about $175.4 billion in total deposits at the end of last year, the FDIC said on Friday. “At the time of closing, the amount of deposits in excess of the insurance limits was undetermined,” the regulator said.

With inputs from agencies