How Recent Bank Collapses Affect Traders
The failure of Silicon Valley Bank (SVB), a US-based banking company that catered primarily to the technology, life science, and venture capital industries, sent shockwaves through global financial markets.
A bank run of $42 billion was sparked when investors and depositors heard that SVB was in trouble. Silicon Valley Bank was closed by the California Department of Financial Protection and Innovation on March 10th.
The US government declared that it is taking extraordinary measures to ensure depositors get their money back. Meanwhile, HSBC bought out the UK branch of SVB.
Tim Mayopoulos started his new role as SVB’s CEO on March 13. When he arrived, his first order of business was to reassure customers that the bank will soon be open for business and accepting deposits once more.
He pleaded with VC firms and IT clients to restore SVB’s financial health by entrusting the bank with their money again. As Mayopoulos emphasised, the FDIC insures all deposits, both new and old, so depositors need not worry about losing their money.
Here, we will take a closer look at the SVB collapse and what this means for traders going forward.
A closer look at the collapse of SVB
The trouble began when the SVB Financial Group, which owns Silicon Valley Bank, released some unfavourable news. Silicon Valley Bank is a rather obscure bank outside of the tech startup scene (and most commonly known simply as SVB).
The tech industry went into a tailspin, but it also caused alarm in the retail banking sector of the United States, with ripple effects felt at the nation’s largest financial institutions.
Many investors are concerned about the state of the banking system as a whole in light of the Fed’s efforts to drain liquidity from the market, and the root reason of the crisis at SVB is still unclear.
When SVB’s parent company disclosed that it had sold $21 billion in securities from its portfolio, the issue surfaced, and it subsequently filed to sell $2.25 billion in shares to strengthen its capital position.
The resulting 60% drop in stock price had a domino effect on the financial sector as a whole. The reason for this was a sudden and significant decrease in bank deposits. Concurrently, SVB reduced its projected net profit.
The ripple effect
It wasn’t enough that too many depositors were pulling their money out of the bank; the situation quickly deteriorated when numerous venture capitalists did the same.
That group included prominently Peter Theil’s Founders Fund, which had previously asked its portfolio managers to reduce their holdings in SVB.
The action triggered what was essentially the beginning of a bank run. The company’s CEO called their biggest clients to reassure them and head off a mass exodus. Many venture capitalists have expressed their intention to maintain their current banking relationship.
Coincident with the SVB collapse was the unexpected shutdown of Silvergate Capital, which had significant holdings in cryptocurrencies. Only SVB, which is listed on the stock market, caters to the needs of Silicon Valley’s many tech startups.
Startups in the technology industry in particular have had a hard time attracting venture capital since interest rates have risen while actual rates have fallen due to inflation. That made SVB especially susceptible to the tech industry’s collapse as entrepreneurs withdrew funds to survive the rising cost of doing business.
This, in turn, was followed by trouble at Signature Bank.
Around USD 110 billion in assets and over USD 88 billion in deposits were reported to the New York Department of Financial Services.
Given that Signature Bank is the third regional bank to fail in the last two weeks following Silvergate Bank and SVB, many investors are worried that we may be heading back towards the financial crisis of 2007-2008. Investors are on high alert now, fearing broad financial vulnerability as a result of this.
Signature Bank’s stock price dropped about 25%, from USD 87 to USD 70, despite the bank’s publication of new financial statistics and limited crypto deposit levels on Thursday to improve diversity.
Customers of Signature Bank who expected the bank to fail shifted their money to more stable institutions like JPMorgan Chase and Citigroup.
The fate of the markets going forward
Runs on other banks with comparable lending and liquidity profiles may be triggered by the collapse of SVB and Signature Bank. The majority of depositors still worry despite efforts made by the Fed and The Treasury.
Foreign contagion, additional crypto market failures, and larger contamination of other financial markets are also possible outcomes. The world economy would suffer severely in the worst-case scenario.
Moreover, the collapse of SVB could leave a gap in the market for financing technology companies, prompting a retreat to traditional banks that are simpler but less likely to give bespoke funding.
Because of this, financial institutions may be compelled to liquidate assets at a loss in order to restore their balance sheets and maintain liquidity. The FDIC’s decision to exempt the two failing banks from systemic risk may have unintended consequences for the industry as a whole.
Since the SVB collapse, attention has been focused on private investments in technology. This fallout, for instance, may cause investors to pay closer attention to the investments of SoftBank Group Corp.
Japan’s SoftBank Group Corporation is a holding corporation that focuses on making investments in the electronics, energy, and finance industries.
SoftBank Vision Fund investors are worried about the safety of their investments in young companies. The price of SoftBank stock has dropped by 13%, passing below the 5,000 yen threshold that could prompt a repurchase announcement.
Several sectors of the tech industry may feel the effects of this chain of events differently. Startups may have to adjust their business strategies if getting finance becomes more difficult.
The collapse of Signature Bank is likely to prompt a closer look at banking laws, risk management measures, and collaborations with cryptocurrency firms.
Major cryptocurrencies like Bitcoin and Ethereum have already recovered, showing renewed confidence in decentralised assets, suggesting that the impact on the crypto market will be temporary.
Because it is a specialised bank with numerous unique tools, networks, and information, the closing of SVB will have far-reaching consequences, both in the near and long terms. The networking events hosted by SVB were essential in bringing together investors and business owners.
It turned around mortgage applications quickly, helped startup founders with advice and mentoring as they built their companies, made investments in new companies, and backed the VC firms that worked with them.
Traders and the option of safe haven assets
It’s common practise for investors to shift their holdings towards “safe-haven” assets during moments of market turbulence. It is possible for investors to better weather market fluctuations if they anticipate which assets will increase in value while others decrease.
In times of economic distress, it is common practise to put money into “safe-haven” assets like gold and government bonds. These assets are either uncorrelated with the economy or have a negative association with it, so they may increase in value during a market downturn.
Investors should consider the specifics of the current economic climate before deciding which safe haven to put their money in. This highlights the need of investors clearly articulating their objectives in the context of safe-haven investments.
The precious metal gold is often seen as a haven in times of market uncertainty. As a physical commodity whose supply cannot be altered by measures like printing (also known as quantitative easing), the price of gold is unaffected by interest rate choices made by central banks.
The example of gold’s use as a safe haven asset following the financial crisis of 2008 is instructive. In 2009, for instance, investment drove the price of gold up by more than 24 percent, and it has continued to rise consistently ever since, all the way into 2011.
Because of gold’s long history of serving as a currency backbone and a store of value, many people mistakenly assume that the desire to buy gold is driven by irrational ideas.
The traditional thinking is that investors flock to buy gold when they spot precursors to a large market catastrophe, as the precious metal has a history of acting as a safe haven. Holding gold as a safe haven investment has become a self-fulfilling prophecy.
Your exposure to market volatility can be lowered and your wealth protected with an investment in a safe haven asset. When the market is falling, the value of safe haven assets tends to rise relative to that of other markets.
Knowing which assets are considered safe havens in the case of a financial crisis is essential for investors.
They can then use the most appropriate risk management strategy, such as selling long positions or buying short ones, in anticipation of the price movement of other assets that are declining in value.
Events like stock market bubbles, crashes, and economic recessions can have long-lasting, negative consequences on an investor’s portfolio value.
A market slump is a natural and inevitable aspect of the market cycle, therefore it’s best for investors to take as many safety measures as they can to prepare for it, such as the one which may arise from the recent banking collapse.
During economic downturns, safe-haven assets tend to outperform the broader markets.