Silicon Valley Bank's collapse signals the end of the era of cheap capital?

Cracks are appearing in the global financial system, with some investors fearing the shock collapse of Silicon Valley Bank (SVB) could signal to world markets that a decades-long era of cheap capital is ending.

Over the past year, the US Federal Reserve (Fed) has embarked on its most aggressive interest rate hike cycle since the early 1980s, and other central banks are joining the race to raise interest rates, leaving global investors facing a range of consequences.

They have seen the longest tech stock sell-off since the dotcom bubble at the turn of the millennium, a collapse in the cryptocurrency industry, a rush to exit real estate funds in the US and UK, and the intervention of the Bank of England (BoE) to prevent the imminent collapse of the UK pension fund.

After the second-largest bank failure in US financial history on March 10, market participants fear more disruptions ahead, as rising interest rates cut off access to cheap funding and expose “vulnerabilities” in the economy .

A difficult problem for the Fed

Major investors including Kyle Bass and Bill Ackman say the US government must act quickly to avoid a collapse of SVB triggering a wider run on the banking system.

So far, the pain has been felt by most investors and institutions that have taken risky bets. Whether the pain spreads to others and a new crisis emerges remains to be seen. That may be determined by how hard it is for central banks around the world to push interest rates higher.

People walk through the parking lot at the Silicon Valley Bank (SVB) headquarters in Santa Clara, California, March 10, 2023. Photo: Getty Images

“When you aggressively raise rates after you’ve created so much inflation, you’re going to break something,” said Kyle Bass, founder and chief investment officer of Hayman Capital Management. “And what they’re going to learn is that their rate hikes are as reckless as their money printing.”

Referring to the connection between the SVB collapse and interest rates, ING strategists commented: “What the stock markets do here is irrelevant. They may be under pressure, but what really matters is the financial system. Put simply, if that system is threatened, the Fed cannot raise rates at all.”

According to ING experts, from the global financial crisis and the pandemic, it can be seen that the Fed only cares about the system being threatened. And to ensure the safety of the system, they have cut interest rates and loosened monetary policy significantly.

“In the case of SVB, we are not there yet, and we may not be there. But if inflation data does not come down significantly, it will put pressure on the Fed to make a difficult choice,” the strategists said.

Fed Chairman Jerome Powell recently reiterated his message of higher interest rates, but stressed that the debate is still ongoing, depending on incoming data. US officials also argued that the banking system is strong.

Still, signs of market uncertainty have increased in recent days: The S&P 500 fell 4.6% this week, nearly erasing the index's gains for the year, while the Cboe Volatility Index (VIX), known as Wall Street's fear gauge, rose to a three-month high.

The yield on two-year Treasuries saw its biggest drop since the 2008 financial crisis. That suggests investors are quickly seeking safe havens, as well as betting that a recession could force the Fed to ease or reverse its aggressive tightening.

People walk past the New York Stock Exchange, in the Lower Manhattan Financial District, New York, March 7, 2023. Photo: Getty Images

The US government says it sees some signs of a 2008-style financial crisis, in which the failure of some institutions threatens to bring others down in their wake. Treasury Secretary Janet Yellen and the White House have both noted that the US banking system remains more resilient than it was during the 2008 financial crisis.

Markets are signaling that the spread could affect the Fed’s calculations, potentially causing it to slow the pace of rate hikes. Investors on March 12 saw a 38% chance of the Fed raising rates by 50 basis points later this month, down from 68.3% the day before.

“The Fed tends to tighten policy until something happens,” said Jack McIntyre, portfolio manager at Brandywine Global.

Unforeseen consequences

Regulators shut down California-based SVB on March 10 after the bank, which had $209 billion in assets at the end of 2022, suffered a run on its balance sheet, with depositors withdrawing as much as $42 billion in a single day, leaving the Silicon Valley bank without liquidity.

SVB’s plight has spooked investors, who are rushing to review all their deposits and quickly withdrawing from places they see as risky. The KBW Bank Index, which tracks the top publicly traded U.S. banks and savings banks, has fallen more than 10% in the past two days, its worst performance since March 2020.

Some banks rushed to reassure customers. First Republic Bank and Western Alliance issued statements saying their liquidity and deposits remained strong, even as both companies’ shares fell more than 14% on March 10, the day SVB was taken over by the FDIC. Meanwhile, Germany’s Commerzbank said it did not see “a corresponding risk” to itself on a day when its shares fell 2.6%.

“The contagion risk from SVB’s collapse has investors selling stocks first and then thinking about everything else later,” said Adam Turnquist, director of technical strategy at LPL Financial.

An FDIC sign is posted in the window of a Silicon Valley Bank (SVB) branch in Wellesley, Massachusetts, on March 11, 2023. It says the federal deposit insurance cap is $250,000. Photo: AP/Times of Israel

The collapse of SVB also affected a number of companies that had business with the bank. Most recently, the stablecoin USD Coin (USDC) lost USD trading and fell to an all-time low after Circle, the US company behind the coin, revealed that part of the reserves backing it were held at SVB.

SVB's collapse is likely to increase pressure on companies to become profitable, ending an era in which investors were willing to take years of losses to expand market share.

Major US investors Kyle Bass and Bill Ackman have warned that the US government needs to act quickly in resolving the SVB case to ensure the rights of depositors.

“The consequences of the government not guaranteeing SVB deposits are far-reaching and unpredictable, and these need to be considered and resolved before March 13,” Ackman wrote on Twitter on March 11.

“If they don’t do it tomorrow, we’re going to have a systemic problem,” Bass told Reuters in an interview on March 12 .

Minh Duc (According to Reuters, Bloomberg)

Source: https://www.nguoiduatin.vn/silicon-valley-bank-sup-do-bao-hieu-ky-nguyen-von-re-da-qua-a597648.html