Saturday, April 1, 2023

Big bank, small bank: this is how the closure of SVB in the US is affected

The recent debacle of the regional bank Silicon Valley Bank (SVB) of California, the sixteenth largest US bank by capitalization, has unleashed a financial tremor in the country, which is putting a dozen medium and small corporations in trouble, and to a lesser extent shares of financial giants.

Since the authorities ordered the intervention of this bank focused on attracting deposits from emerging technology companies last Friday, both the calls for calm and the analyzes have multiplied that suggest that its fall is more a response to poor management of its capital than to system weaknesses.

However, its effects are still being felt on Wall Street, especially among small and medium-sized companies.

“Americans can be confident that the banking system is secure. (…) In my Administration, nothing and no one is above the law,” US President Joe Biden stressed today in a message to reassure Americans and stress that the country’s banking system “is safe.”

At the moment, only one bank, the New York Signature Bank, has seen how the earth opened under the foundations of its branches and the authorities, following the example of SVB, decided on Sunday to close and intervene the entity.

The origin of the problem

SVB raised billions in deposits between 2020 and 2022 thanks to the good performance of technology companies during the pandemic and used most of that money to buy long-term Treasury bonds. With the post-pandemic crisis and the rise in interest rates by the Federal Reserve, which made money more expensive, its clients increased expenses and slowed down the rate of their deposits.

To meet the liquidity needs of the companies it served, the SVB sold US$21 billion in immature Treasury Bonds, resulting in a US$1.8 billion loss, which it tried to offset with a capital increase.

However, after the announcement of this operation, its shares plummeted 60% on Thursday, the capital raising was frustrated and many clients withdrew their funds, which deepened the fall in their titles on Friday, and led the authorities to intervene the entity to prevent the situation from worsening.

The contagion of the national bank

Now, many investors fear that other banks, especially those exposed to the same type of clients, will suffer a sudden flight of deposits that they cannot manage, so they have launched the sale of their shares.

First Republic (-51.42%), which fell 78% this morning, is one of the regional banks most affected by the seismic waves caused by SVB’s intervention. Others like Western Alliance (-49%), PacWest (-47%), Comercia (-26%), Zions (-18%) or Charles Schwab (-8.69%) tried to maintain their composure today despite the colossal falls in their titles.

The Frist Republic tried unsuccessfully to calm fickle market sentiment yesterday with a statement claiming to have further improved and diversified its financial position through access to additional liquidity from the Federal Reserve Bank and JPMorgan Chase.

“The total liquidity available and not used to finance operations is now more than US$70,000 million,” said this bank based in San Francisco (California) yesterday.

One hour after the closing of the stock market, the KBW sub-index of banks, within the Nasdaq, fell 9.29%, although the financial sector fell 2.57%, partly thanks to the fact that the large banks, although they have been strongly affected by the sale of shares, suffered a minor bleeding.

Thus, among the largest corporations in the country, JPMorgan Chase lost 1.20%, Bank of America 3.8%, Citigroup 6.43%, Wells Fargo 5.42% and US Bancorp 7.21%.

This environment of concern also spread to the other side of the Atlantic, where the largest decreases were for the German Commerzbank (-12.71%), the Swiss Credit Suisse (-9.58%), and the Italian Unicredit (-7.84%).

The Spanish BBVA and Banco Santander have lost 8.24% and 7.35%, respectively, and in the United Kingdom, the titles of Barclays left 6.31% of their value and those of HSBC, which today announced the purchase of the subsidiary of the SVB, 4.13%.


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