The global financial markets recently suffered significantly with a loss of approximately £383bn within just two days. This drop was in response to the collapse of Silicon Valley Bank on 10 March, which revealed a staggering $1.8bn loss in US Treasury bonds, ultimately triggering a bank run. This event had a widespread impact on the markets, with the MSCI Asia Pacific Financials Index falling 3.1%, banking stocks on the FTSE 100 and 250 dropping 1.4%, and government gilts plummeting globally.
The collapse of Silicon Valley Bank and its ongoing impact on global markets serves as a warning to other financial institutions to better manage their exposure to the bond market. This event is the latest in a series of market shocks, which have sent ripples through the world economy. Here’s an analysis of causes of the Bank collapse, its impact on global markets, and potential implications for the financial service industry.
A combination of factors contributed to the collapse of Silicon Valley Bank, with the institution’s over-exposure to US Treasury bonds being the primary cause. According to the Bank of England, government debt had ballooned to over £2.4tn by the end of 2022, with banks and other financial institutions making up nearly 20% of the UK’s debt. Silicon Valley Bank’s over-exposure to this market ultimately proved to be its downfall.
The shock of the collapse quickly spread throughout the markets, with investors beginning to worry about the exposure of other banks to US Treasuries. In Japan, banks were hit particularly hard as there was growing concern over their exposure to US bonds, which had seen a dramatic decrease in yields. Similarly, an indicator of credit risk in the eurozone jumped to its highest since mid-July.
The factors that led to the collapse of Silicon Valley Bank shook investor confidence across the world, leading to a selloff in financial stocks. HSBC, which had purchased the UK arm of Silicon Valley Bank just one day prior, saw its shares fall 1.2%. The bank had been attempting to rescue a key lender for technology start-ups in the UK, and was now exposed to the same risks that led to the collapse of Silicon Valley Bank. Credit Suisse, which has been embattled in recent months, experienced a 3.5% drop in its shares after announcing that customer “outflows stabilized to much lower levels but had not yet reversed” in its 2022 annual report.
This SVB collapse is likely to lead to more regulations being imposed on financial institutions in the future. Governments may start to regulate the size of banks’ bond portfolios to prevent them from becoming too exposed to government debt. Governments may also begin to encourage financial institutions to invest in alternative assets to reduce their exposure to the bond market, in order to mitigate the risks posed by government debt.
In addition, governments may begin to impose stricter requirements for banks , such as requiring them to hold additional capital reserves or to reduce the amount of leverage they are allowed to take on. This, however, may eventually lead to a decrease in the availability of credit, and could have serious implications for the economic recovery from the pandemic.
It’s a devastating moment, but the collapse of Silicon Valley Bank serves as a reminder to all banks and financial institutions to better manage their exposure to the bond market. Governments may also start to implement stricter regulations and encourage alternative investments to reduce the risks posed by government debt. As the world economy continues to recover from the pandemic, any further market shocks could have serious implications for global markets.