Silicon Valley Bank Collapse: Implications for Markets & Economy

The collapse of Silicon Valley Bank Financial Group is currently one of the most pressing issues facing financial and stock markets. As of March 12th, California regulators have overtaken the bank and are holding an auction to find a buyer. The FDIC is hoping to secure a buyer before the start of the day on Monday.

Experts believe that a big bank will eventually acquire the remains of Silicon Valley Bank Financial Group, which could provide better protection for deposits and help startups in Silicon Valley go public. If this happens, we may see a significant shift in market sentiment, and a strong market rally may occur.

But, again, the notion of an averted financial crisis could drive this. However, if a buyer cannot be found, the effects of the financial crisis will be felt in full force. Volatility is expected to skyrocket, and risk sentiment may drain from the market.

What is Causing SVB’s Troubles

Many investors and analysts are comparing the current and 2008 financial crises. However, the current situation is different, and the problem does not stem from bad investments and loans. Rather, the issue is caused by too many people taking too much money out of the bank at once. This movement left a small time window for the bank to convert asset bases to cash and fulfill the deposits quickly.

The panic in the market has raised questions about why companies wanted to take out the money in the first place. However, withdrawals take a month, and since we are approaching the mid-point of March, it is safe to assume that the companies initiated the withdrawals somewhere in mid-February.

The answer is that the treasury yield rose more than bank deposits, triggering investors’ instincts to seek the best return on their investments. As a result, data and investor sentiment have pointed towards putting money into short-term yields.

Trading Unknown Waters

The financial mess created by Silicon Valley Bank Financial Group has made the upcoming week a troublesome one for investors. Traders are finding it difficult to find accommodative market positions, and if the company does sell, we could see an uptick in risk appetite. However, it could hurt the company’s share price if the balance sheets cause concern for SVB’s business model.

The situation is critical, and it is hard to imagine that just a week ago, the markets and the Fed were deploying a data approach to determining the next rate hike. Everything depends on SVB bank’s position in the next few days.

The current situation mirrors the Fed’s 4.50% United States interest rate hikes in the past year. The US CPI due later in the week will be interesting as it will complete a larger set of data that the Fed will monitor to make the next step on rate hikes.

Market participants anticipate a 0.4% price increase for the second month of the year as the annual rate drops to 6%, which is still far off the ideal 2%. If analysts’ predictions are correct, this will signal that rate hikes are working, and 25bp will be the way to go in two weeks. However, if the situation does not pan out, the Fed could move for a more aggressive 50bp rate hike to try and control inflation.