View from Vox: SVB collapse marks the end of the age of exuberance

For technology investors, this weekend will have proved an agonising one as they awaited the potential fallout from the sudden collapse of Silicon Valley Bank on Friday. The failure of the US’s 16th largest bank marks the largest since the financial crisis.   

As a key lender to the industry, many startup companies held their cash with the California headquartered lender, including an estimated £6.7bn held across 3,500 companies in its UK division. The collapse of the bank was feared by some to be “an extinction-level event” for the cash-hungry industry, with fears that startups may be unable to access the funds needed to stay afloat.  

Many will have breathed a huge sigh of relief this morning, then, as news emerged that company after company confirmed that they had either no funds deposited with SVB, or at worst minimal exposure. Further relief came from news that, after talks over the weekend, that HSBC was stepping in to buy the bank's UK division for £1 and would guarantee any deposits. 

Only Polarean Imaging (POLX)Follow | POLX, which had $12.4m on deposit with SVB, chose to suspend its shares. That represents the vast bulk of its cash position, although it noted that $9.8M of that was held in money market mutual fund accounts operated by other financial institutions. 

Although it’s confident that the money will be returned – and said it had sufficient working capital to operate until the end of April - it is awaiting clarification from SVB’s receiver, the Federal Deposit Insurance Corporation, to establish procedures for the return of the cash. Although SVB’s deposits of $175bn include $150bn not covered by the FDIC’s guarantee of $250,000, US authorities have said all would be made whole, offering banks a new central bank-backed borrowing facility.  

Nothing to see here then? 

Not quite. Although the SVB collapse is certainly not systemic in the same way that the collapse of Lehman was in 2008, it highlights the potential damage that rising rates pose to the financial system and the gordian knot central bankers face in their fight against stickier-than-expected inflation. 

In SVB’s case, its troubles stem from a mismatch between the amounts held on deposit and the amounts issued as loans – instead of lending out its deposits, it invested heavily in long-dated bonds, whose value has been falling as interest rates have risen. A $1.75bn capital raise on 8th March triggered concerns that SVB was short of cash, creating a vicious circle as it was forced to sell its bond portfolio at a loss as customers rushed to withdraw funds. 

The big question now is whether other institutions may be facing similar losses on bond portfolios, a concern that has led to heavy selling across equity markets this morning, particularly of bank shares, with Barclays down 4.3%. According to the FDIC, US banks are sitting on $600bn of unrealised losses on bond and mortgage-backed security prices. 

One investment manager suggested SVB could be “could be the first cockroach in the cellar”. Indeed, the collapse of SVB was followed swiftly by the failure of Signature Bank, the third largest bank insolvency in US history, and there are concerns that some smaller regional banks may be at risk. San Francisco-based bank First Republic saw its share fall by two-thirds in pre-market trading after it said on Sunday it would receive $70bn from JPMorgan and the Fed under its rescue plan.

As a consequence, some analysts including those at Goldman Sachs are now suggesting that the Federal Reserve may call a halt to further rate rises lest they cause further damage to an already stressed system - and that means inflation could remain higher for longer. 

And while slowing rises have previously been celebrated by the market, this time they may instead be interpreted as a sign of inherent weakness within the economy that aren’t supportive of a return to indiscriminate risk-on investing. That the Fed blinked in the face of a relatively small collapse is hardly a sign that all is well elsewhere. So even if SVB’s collapse is not be systemic - as seems the case - it could rubberstamp the end of a long period of tech-led investor exuberance.