News Flash - Mars 2023


The week of March 6, Silicon Valley Bank (SVB), a specialist in venture capital financing, ran out of money and was forced to sell the equivalent of USD 21 billion in US treasury bills and embarked on a capital raise. However, Friday, March 10, the bank could no longer cope with withdrawal requests and the US authorities declared it insolvent and assumed control of the bank.

The US regulator has also taken steps to protect customers’ deposits and ensure that customers are able to access their funds. Although the authorities have also begun the process of selling the bank’s assets, Janet Yellen has rejected a government bailout of the bank. Shares in banks have fallen sharply in recent trading sessions as a result of fears of contagion across the sector. At the same time, New York’s Signature Bank (which holds USD 89 billion in deposits) has been closed by its regulator.

The measures taken

In response to the panic caused by the insolvency of SVB, the US authorities (the Treasury, Fed and FDIC (Federal Deposit Insurance Corporation)) have announced measures aimed at avoiding a bank run. The idea is to reassure economic agents about the solidity of the US banking system. The authorities are considering guaranteeing the full amount of deposits held with Silicon Valley Bank, the vast majority of which are not covered by the standard USD 250.000 guarantee.

Above all, the Bank Term Funding Program (BTFP) will offer banks, savings associations, credit unions and other eligible deposit institutions loans with a term of up to one year.

As a result of this programme, it will no longer be necessary to rapidly sell off securities in times of stress as the programme will be sufficient to cover all US uninsured deposits. The facility is supported by the Treasury, which has contributed USD 25 billion.

Furthermore, the discount window that allows banks to access financing at a slight penalty remains "open and available", according to the Fed. Regulators stated that all SVB’s depositors would be able to access their money on Monday, as would those with deposits at Signature, closed by the New York Department of Financial Services before being placed under the control of the FDIC and put on sale.

These measures have allowed the US financial system to avoid the worst. Overall deposit guarantees should limit any bank run.

Last but not least, the financial authorities have issued a key message to the world, namely that the current banking system is not the same as it was in 2008, and that it is based on stronger balance sheets.

Market reaction and implications for monetary policy

A violent risk-off movement descended on the markets when the news broke, more precisely when the European markets closed on Thursday. The European and US equity markets have since fallen nearly 4%, accentuating a downturn already seen in the United States a few days earlier. In terms of sectors, Finance was particularly affected, while defensive sectors performed better in relative terms.

Another segment that has performed well is gold: it gained nearly USD 100 an ounce in the space of a few days, rising from USD 1.800 to nearly USD 1.900.

However, the most remarkable movements were seen in fixed income markets, with historic falls in bond yields on both sides of the Atlantic. At the beginning of the week of March 12, two-year German and US yields fell 50 basis points, making it a historic day on the markets.

This wave of panic calls into question the ability of central banks to continue with their aggressive campaign of hiking interest rates.

While, the week of March 6, the markets considered that a 50 basis point interest rate hike was likely, they are now only expecting a 25 basis point hike following the next three Fed meetings. We also note that the markets are once again expecting the Fed to cut its key rates later this year. This event and market pricing has significantly weakened the Fed’s recent rhetoric. Similarly, for the ECB, the markets were forecasting a terminal rate of almost 4% the week of March 6. Currently, the terminal rate is just above 3%.

The dilemma for central banks such as the Fed and the ECB is all the more critical given that inflation continues to be an issue: the latest inflation figures were surprisingly high again last month in an environment in which the labour market remains too dynamic.

Accordingly, although it is possible that they will not radically change the direction of their monetary policy due to the current levels of inflation, a proliferation of measures aimed at protecting the banking system as a whole should not be ruled out. For example, a fragmented monetary policy that seeks both to combat inflation and ensure financial stability seems to be a possibility.

Our view on European banks

We believe that a similar episode in Europe is unlikely. SVB’s issues seems specific to its particular customer base, almost exclusively US venture capital-backed technology and start-up companies that tend to burn through their cash reserves. The slowdown in venture capital investments as well as the consumption of cash by SVB’s customers therefore put pressure on the group’s liquidity. This category of customers is not representative of the customer bases of European banks. The European authorities also limit the risks run by financial institutions in Europe by setting very strict liquidity ratios. The Liquidity Coverage Ratio (LCR), which measures the proportion of highly liquid assets held by a bank against its short-term bonds, must always exceed 100%. The LCRs of the major European banks are currently solid, with an average level of 168%. Therefore, the forced sale of European banks’ bond portfolios seems unlikely to us.

On the other hand, SVB’s insolvency could cause more serious problems for US start-ups and companies that finance themselves through venture capital. In the financial sector, private investments (such as those by private equity funds) exposed to non-profitable Silicon Valley companies could therefore come under increased pressure.

Our stock-picking positioning

In overall terms, we consider that a defensive positioning is preferable at a time of complex economic slowdown coupled with monetary tightening.

Of course, pitfalls of this nature are difficult to predict, but their likelihood of occurrence is increased in the current macroeconomic environment. It should not be forgotten that central banks, through monetary tightening, are not only attempting to tackle inflation, but also to correct the financial excesses that have formed in recent years.

The fight against inflation is not over, and a complete change in monetary policy is therefore unlikely. On the economic front, a rapid return of confidence and a sustained and significant recovery are also absent from our central scenario. Banks have, in general terms, already tightened their lending criteria for monetary policy reasons. At present, the danger is that their appetite for risk decreases further in view of the current outbreak of panic.

Aykut Efe
Economist & Strategist
Spuerkeess Asset Management

Rémy Jacqmin, CFA
Portfolio Manager
Spuerkeess Asset Management