Will SVB turmoil spread wider?

Hot on the heels of the volatility from Jerome Powell’s appearance before US lawmakers this week, at which the Fed chair struck a hawkish note, markets are now having to contend with a crisis in the banking sector.

What happened at Silicon Valley Bank?
Silicon Valley Bank (SVB) has been a key institution for startups in the US, and provides funding for a large number of small firms. Declining deposit levels and a large loss on the sale of securities drove a huge slump in the shares.

This then caused a drop in bank shares around the globe, as investors began to fret that SVB’s exposure to rising interest rates through its purchase of long-dated securities would be replicated at other US banks like JPMorgan.

Even now, some fifteen years after the Global Financial Crisis (GFC), investors remain jittery about banking problems. There is a tendency to see echoes of Bear Stearns and Lehman Brothers in events like this, even if the spillover should be relatively contained.

SVB appears to be an outlier in terms of its exposure to rising rates, and it does not appear that major US banks are likely to be affected. In any case, mechanisms set up after the GFC are designed to prevent problems becoming systemic.

What about the market reaction?
Bank stocks fell around the globe, but for the moment it looks like the crisis is contained. But it is impossible to escape interest rates at the moment – this problem for SVB is one of the unexpected consequences of the Fed’s move away from ultra-loose monetary policy and very low interest rates.

Looking just at the US, we can see that the broad financial sector has been a weak performer since Covid, lagging far behind the S&P 500 in its returns:

Even the turn to higher interest rates over the past year has not proved to be a boon for the sector, despite hopes that profitability would rise. Concerns about a recession remain paramount, and Jerome Powell’s comments this week have only strengthened worries about a US recession sometime in the next two years.

The SVB problem comes at a time when sentiment is already fragile, and with US CPI and an ECB meeting next week, followed up by the next Fed decision, it may be that stocks, and banks in particular, may once again struggle to make headway.