The reason this may not be an existential crisis for the entire banking system is that, even if the high street banks are currently nursing large paper losses on their bond portfolio, because they do not presently have to sell the bonds to raise capital depositors are not fleeing their bank.
Moëc says the actions of the Federal Reserve probably mean the problem will not infect other banks at this time.
The market’s response has been to sell off the shares of most European and US banks on the basis that the value of their capital reserves must be called into question, potentially forcing them to raise more capital, diluting the equity or debt positions of current investors.
William Dinning, chief investment officer at Waverton, says the major impact on markets may be that interest rate expectations for the next year are radically different, with the previous expectation of multiple interest rate rises in the US now turning to a view that interest rates could be cut three times by the end of January 2023.
Dinning notes that the 10-year US government bond price has risen sharply since the collapse of SVB, and that this is a financial asset to which people usually turn when they wish to add less risk to portfolios.
But his view is that right now (as of March 13) markets are operating in a state of fear, so it is hard to make longer-term judgements on the impact.
Adrian Hull, global head of core fixed income at Aegon Asset Management, says that while the actions of the Fed have soothed investors' fears that there could be a systemic problem in the banking system, the events around SVB have made the market ponder which parts of the economy are more generally vulnerable to higher interest rates.
He says: “The markets worry and today that worry has pushed risk assets (such as non-government bonds and equities) lower in price. There remain lingering concerns, not so much around systemic banking issues, but rather which other entities have business models that are unsuited to the step change in interest rates?”
Hull says higher interest rates have reduced the amount of liquidity in investment markets, and markets are presently pondering which investments are vulnerable to this.
Moëc sums up the market’s current reactions rather sardonically as: “rising interest rates hurt – who knew?”
Contagion conundrum
Filippo Allaoti, head of financials within the credit team at Federated Hermes, says the problem with SVB was not so much with it being a bank but instead with it being almost uniquely a bank for technology companies.
