With the recent failure of the Silicon Valley Bank (SVB), we thought it prudent to provide an update.
Who is SVB?
SVB, based in the United States, offers a range of banking services, including cash management, foreign exchange, investment services, and corporate credit cards. It focuses on the technology industry and has become a key player in the financing of startups and emerging growth companies.
What has happened?
In short, several forces have collided resulting in failure. The main issue began a year or so ago when the Federal Reserve attempted to tame inflation by raising interest rates. Higher borrowing costs sapped the momentum of tech stocks. Higher interest rates also eroded the value of long-term bonds.
At the same time, venture capital began drying up, forcing startup companies to draw down funds meaning SVB was faced with unrealised losses in bonds at a time when customer withdrawals were escalating. In simple terms, funds were being withdrawn faster than SVB could access it.
What has happened since?
The UK government helped strike a deal for HSBC to buy SVB’s UK operations, saving thousands of British tech startups and investors from big losses. The knock on effects of SVB’s failure has led to issues with the Credit Suisse bank, which has in turn been supported by the Swiss Central bank.
What does this mean for markets?
Undoubtedly short-term volatility as the market often overreacts in the wake of these types of events.
Many financial commentators expect the Fed to halt its rate hiking cycle, and report that there is nothing that drives banks to pare back lending like a bank failure. Although the situation is very fluid, the regulators have acted proactively.
While this is a distressing situation, it is hoped that the broader plumbing put in place by the Fed in the wake of the 2008 crisis, should prevent this problem from becoming a wider concern. It is very likely that Markets will remain jittery in the short term.
In summary, it does not appear that SVB’s fall will impact the larger US banks, whilst Central Banks and relevant authorities have acted swiftly to prevent any major contagion risk.
What does it mean for me?
As always, Invest Southwest takes a long-term view and position regarding investing, riding the emotional highs and lows of the markets. Rather than make knee jerk reactions to short term volatility, we continue to focus on your circumstances and long term objectives.
17 March 2023
The views expressed in this blog do not in any way constitute advice and are specific to the date noted. As time passes the facts can change and readers should consult their adviser for up to date advice on any matters covered within the blog. Invest Southwest offers an initial review, which is free of charge, however long it takes. From this we will be able to confirm how we can help and give you an opportunity to decide if you would like us to. Thereafter, we will provide you with detailed recommendations and exact costs. Please note that we promise not to levy any kind of fee unless we can demonstrate a benefit to you.
