The intervention of a bank in Silicon Valley that in 30 years has always made a profit has stunned the financial world. We are talking about an entity that SVB did business with almost half of all the new companies backed by venture capital in the US And, as Manuel Romera, director of the financial sector at IE Business School, says, the reaction of the markets is fear which, in his opinion, is understandable. “How many banks are in this situation? This is the problem. The SVB case reminds us that there are many entities that are highly indebted and with little liquidity and limited solvency. You have to understand that we are running out of open bar ”, he warns. “Interest rates can hardly go up without triggering pain,” recalls Gilles Moec, chief economist at Axa Investment Managers.
Experts explain that when liquidity crises affect banks, they usually have very important consequences due to the contagion effect that it can have on other financial institutions. One way to deal with these liquidity crises is to sell public debt assets that banks hold in their portfolios. This is what happened with the SVB. However, when interest rates have risen very rapidly, as has been the case in recent months, these bond portfolios include losses that only materialize if there is a hasty and forced sale in the market.
But, as Filippo Alloatti of Federated Hermes Limited pointed out in a report, Silicon Valley Bank (SVB) had problems with its “SV” (Silicon Valley) side more than its “B” (Banking) facet. “The problems SVB was facing were more related to its clients and the industries it served (the Silicon Valley-based venture capital and technology sectors) than to issues related to its core banking operations. The bank's deposit base was highly concentrated in these sectors, and the bank's financial results were affected by economic conditions in these industries,” he says.
Indeed, there are many reasons to think that contagion will be limited. We are therefore talking about an idiosyncratic case, with a concentration in a single sector (technology, in this case), very sensitive to deposit withdrawals, in a context in which financing is running out and startups need to have access to their cash , because they consume a lot of capital.
In a note, Investing.com analyst Ismael Cruz affirms that “the contagion should not go any further. Concerns about the bench are not justified. The knee-jerk reaction of the market seems somewhat exaggerated. It has caused a great psychological impact that has awakened the old demons of the market ”, he exposes. To add: "It is true that the European banking sector, especially the Spanish one, has revalued a lot in recent months due to the rise in interest rates, rising more than double that of the Stoxx600". In other words, yesterday was a good time to checkout. Josep Soler, director of the Institut Estudis Financers (IEF), is pragmatic. “Today I would not be very worried. They lose their nerves and it is something normal. Many investors in Europe took the opportunity to make profits and switch to fixed income, which in a context of rising interest rates offers higher returns.
“The current uncertainty in the market is great but it cannot be compared to the situation that was generated by the bankruptcy of Lehman Brothers in 2008. European banks are not as involved in the business of technology companies and the ECB has tools to support the liquidity of European entities”, writes Alfredo Jímenez, from the Spanish Institute of Analysts.
In turn, when talking about contagion, Enrique Reina, a banking partner at the financial consultancy Accuracy, resorts to a very graphic image inspired by the clinical picture. .As he tells it, banks can die of cancer or heart attack. “The first case occurs when a customer withdrawal becomes a liquidity problem, which is a sudden attack on the bank's health, before the problem is solvency, which is a slower pathology, like cancer. Once it is ensured that depositors will collect their money, the waters calm down. Thus, the risk of contagion to Spanish entities is quite low”.
