© Reuters. FILE PHOTO: A view of Silicon Valley Bank’s (SVB) Park Avenue location, in New York City, U.S., March 10, 2023. REUTERS/David ‘Dee’ Delgado
By David Randall and Davide Barbuscia
NEW YORK (Reuters) – Cracks are appearing in the global financial system as the decade-long era of cheap money ends, and some investors fear that the collapse of Silicon Valley Bank indicates that world markets may be on the verge of a crash. reckoning.
Over the past year, the US Federal Reserve launched its most aggressive interest rate hike cycle since the early 1980s and other central banks jumped on board, leaving global investors facing a variety of consequences. .
They have seen the longest sell-off in tech stocks since the dotcom bubble at the turn of the millennium, a collapse in the cryptocurrency industry, a run on US and British property funds, and an intervention by the Bank of England to avoid a near collapse. of UK pension funds.
After the second largest bank failure in US history on Friday, market participants fear more disruption is ahead as rising interest rates cut off access to cheap money and expose vulnerabilities in the economy.
Big investors, including Kyle Bass and Bill Ackman, argue that the government must take swift action to prevent the collapse of Silicon Valley Bank from triggering more widespread runs in the banking system.
Until now, the pain has largely been felt by investors and institutions that made long shots. It remains to be seen if the pain spreads to others and a new crisis arises. That could be determined by how strongly the world’s central banks continue to push interest rates up.
“When you go on such an aggressive move after creating so much inflation, you’re going to break something,” said Kyle Bass, founder and chief investment officer of Hayman Capital Management.
“And what they (the Fed) are going to learn is that how fast they raised rates is just as reckless as how fast they printed money,” said the investor, who does not hold a position at SVB.
Federal Reserve Chairman Jerome Powell on Wednesday reaffirmed his message of higher rate hikes, but stressed that the debate was still ongoing, depending on upcoming data. US officials have also argued that the banking system is sound.
Still, signs of market unease have increased in recent days: The S&P 500 fell 4.6% this week, nearly erasing its gains for the year, while the Cboe Volatility Index, known as the fear gauge on Wall Street, rose to its highest level in 3 months. Two-year Treasury yields saw their biggest drop since the 2008 financial crisis. That suggests a flight to safety among investors, as well as bets that economic difficulties may force the Fed to ease or reverse its policy. aggressive hardening.
The US administration said it sees little sign of a 2008-style financial crisis, in which failing institutions threatened to topple others in their wake. US Treasury Secretary Janet Yellen and the White House noted that the US banking system remains more resilient than it was in the 2008 financial crisis.
The market is signaling that contagion could be a factor in the Fed’s calculation, possibly prompting it to slow the pace of interest rate hikes. Investors were now pricing in a 38% chance that the Federal Reserve would raise interest rates by 50 basis points by the end of this month, down from the 68.3% chance seen the day before.
“The Fed normally tightens until something snaps,” said Jack McIntyre, portfolio manager at Brandywine Global.
California banking regulators shuttered Silicon Valley Bank on Friday after the bank, which had $209 billion in assets at the end of 2022, experienced a run, with depositors pulling out as much as $42 billion in a single day, which left him insolvent.
Similar to the UK pension fund crisis in September, the company appeared to be on the wrong end of rising yields, leaving it exposed to interest rate risk and unable to meet its obligations.
Investors looked elsewhere for vulnerabilities and fled other banks where they perceived risks. The KBW Bank Index has fallen more than 10% in the past two days, its worst drop since March 2020.
Some banks were quick to reassure. us lenders Bank of the First Republic (NYSE:) and Western Alliance (NYSE:) issued statements to say liquidity and deposits remained strong, even as shares of both companies fell more than 14% on Friday. Germany’s Commerzbank (ETR:), meanwhile, said it saw no “corresponding risk” for itself on a day when its shares fell 2.6%.
“Contagion risk from the collapse of SVB Financial triggered a sell now, ask questions later, backdrop for stocks,” said Adam Turnquist, chief technical strategist at LPL Financial (NASDAQ:). He noted that less than half of companies were trading above their 200-day moving average, a sharp drop from 79% in February.
Silicon Valley Financial Group was deeply entrenched in the fabric of the technology industry. It was a source of funding for startups and a popular provider of payroll processing and personal wealth management.
Regulatory data shows that 89% of the bank’s $175 billion in deposits were uninsured at the end of 2022, with billions left stranded as regulators tried to find a buyer.
The consequences have affected several companies that did business with the bank. In the latest, stablecoin (USDC) lost its peg to the dollar and fell to an all-time low after Circle, the US firm behind the coin, revealed that a portion of the reserves backing it were held at Silicon Valley Bank.
The bank’s failure is likely to increase pressure on companies to be profitable, ending the era in which investors were willing to put up with years of losses to gain market share.
Bass and Ackman separately warned that the government would have to move quickly to resolve Silicon Valley Bank to insure depositors.
“The unintended consequences of the government’s failure to guarantee SVB deposits are wide and deep and must be considered and addressed before Monday,” Ackman wrote in a tweet on Saturday.
“If they don’t do it by tomorrow, we have a systemic problem,” Bass told Reuters in an interview.
