SVB collapse: Why world equity markets are feeling the heat of the crisis

While US President Joe Biden has vowed action against those responsible for the Silicon Valley Bank “mess,” British Prime Minister Rishi Sunak recognises the “anxiety” over the collapse and India’s Union Minister of State for Electronics and IT, Rajeev Chandrasekhar is set to meet startup founders and CEOs to understand how the government can assist them to overcome the crisis.

Israeli Prime Minister Benjamin Netanyahu too said the government would assess the effect of SVB’s collapse on Israeli companies and determine whether or not to assist them.

While governments are looking to minimise the impact of the fallout on their industries, the stock markets around the world remained nervous on March 13.

California-based Silicon Valley Bank, the 16th largest bank in the US, was shut down on March 10 by the California Department of Financial Protection and Innovation which later appointed the FDIC as its receiver.

SVB was deeply entrenched in the tech startup ecosystem and the default bank for many high-flying startups; its abrupt fall marked one of the largest bank failures since the 2008 global financial crisis.

The bank failed after clients — many of them venture capital firms and VC-backed companies that the bank had cultivated over time — began pulling out their deposits, creating a run on the bank (among the biggest US bank runs in more than a decade). Bank runs occur when customers or investors gripped by panic start withdrawing their money, causing the bank to be incapable of paying its obligations as they come due.

CNBC explained that the roots of SVB’s collapse stem from dislocations spurred by higher rates. As startup clients withdrew deposits to keep their companies afloat in a chilly environment for IPOs and private fundraising, SVB found itself short on capital. It had been forced to sell all of its available-for-sale bonds at a $1.8 billion loss, the bank said late Wednesday.

On March 10, banking stocks, were under pressure after news on Thursday that SVB Financial Group, which does business as Silicon Valley Bank, had sought to reassure tech clients as its stock collapsed by 60 percent while it was attempting to raise funds to plug a $1.8 billion hole caused by the sale of a loss-making bond portfolio.

Reuters reported markets were set for a bumpy ride this week as the fallout from collapsed startup-focused lender SVB coincides with key economic data and policy meetings.

However, analysts cited by CNBC say the collapse of Silicon Valley Bank is not likely to have a major contagion effect in Asia though one analyst says it could be seen as a “warning” — especially for economies that haven’t hiked interest rates aggressively.

Shares of SVB-exposed companies traded mixed across Asia on Monday, while bank shares slid to the lowest level in more than two months. “Most think that SVB is an idiosyncratic risk that is being bailed out by the US authorities,” said Hao Hong, chief economist at Grow Investment Group. “For now, the market is choosing to overlook these technical details.”

Several Asian technology firms across China, Japan, Hong Kong, and Australia have disclosed cash deposits at SVB with most emphasising the amounts were immaterial to their operations. Back home, game developer Nazara Technologies said two units indirectly related to the company held about $7.8 million in cash balances at SVB.

At least a dozen Hong Kong firms, mainly involved in biotechnology, listed SVB as their banker in exchange filings, as per founder of Webb-site.com David Webb. That puts hundreds of millions dollars at risk for these small-cap firms, of which many are in their early stages of operation and unprofitable, Bloomberg reported.

Despite the optimism around Asian markets, Indian indices — Sensex and Nifty 50 — ended the March 13 trading session with losses. Financial services stocks remained under pressure as investors were watchful of the fallout of Silicon Valley Bank and its impact on domestic markets. The 30-share BSE Sensex dropped over 890 points to 58,237.85 and the broader NSE Nifty fell over 220 points percent to 17,186.50.

Gold raced towards the key $1,900 level on Monday as investors sought cover from the uncertainty triggered by the collapse of Silicon Valley Bank, emboldened by bets that the Federal Reserve may now have to tone down its rate hikes.

Spot gold was up 0.9 percent at $1,885.37 per ounce, as of 2:34 pm. Earlier in the session, prices hit their highest since early Feb at $1,893.96. US gold futures gained 1.2 percent to $1,889.50.

After the collapse of Silicon Valley Bank (SVB) and the jittery state of other banks like Signature Bank, economists are beginning to pencil in fewer hikes from the US Fed, but the Street is deeply divided.

While Goldman Sachs expects no hike in March, but one hike each in May, June and July taking the terminal rate to 5.25-5.5, Robert Sockin, Global Economist at Citi said he expects a 50 bps hike this month and a terminal rate of 5.5-5.75 percent. With risks to the upside, even 6 percent is possible, he said.

GS added that there is considerable uncertainty about the path while Sockin said he thinks SVB is idiosyncratic and that the US banking system is healthy and big banks have high capital.

Also, former Treasury Secretary Lawrence Summers had earlier warned that there will be “severe” consequences for the innovation sector of the US economy if regulators don’t smoothly work out the collapse of Silicon Valley Bank.