Silicon Valley Bank collapse might just hurt SA markets
Usually if an advanced economy sneezes, developing countries get a bad flu, but the reverse may not be true with Silicon Valley Bank.
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The collapse of the Silicon Valley Bank recently might just cause a sneeze in South Africa as emerging markets suffered less, losing just 1.5% compared to the 10% of advanced economies’ bank equity prices.
However, the collapse of the Silicon Valley Bank represents a major threat to the US’ financial system.
US bank Silvergate Capital was liquidated two weeks ago and was followed by the collapse of Silicon Valley Bank (SVB), raising questions about broader financial market contagion.
But economic research group, Oxford Economics Africa, says it believes that the measures put in place by the regulators, including the introduction of the new Bank Term Funding Programme, should be enough to calm investor nerves and help curb the flight-to-safety of last week.
However, the group warns that African capital markets remain susceptible to fluctuations in advanced market sentiment and risks are currently heavily tilted to the downside.
The group says the collapse of SVB is a major threat to the country’s financial system as the markets see it as potentially symptomatic of similar problems at other banks globally, although SVB was only the 16th largest US bank.
It was one of many banks holding large portfolios of long-dated securities, which could incur heavy losses if sold before maturity.
Oxford Economics Africa says it cannot rule out the possibility that other firms will find themselves poorly positioned with the Fed in the midst of its most aggressive pace of rate increases in 40 years.
“What happens in the US informs global risk sentiment and this is the main channel where Africa will be affected. Indications are that there is little risk of contagion and that the broader impact, should our baseline hold, will be limited.”
The group expects that the US economy will undergo a mild recession during the second half of this year primarily because the Federal Reserve will continue to tighten “until they break something”.
The SVB collapse is the first major sign of that happening and as they continue to increase rates there are likely to be other signs.
The Bureau for Economic Research at Stellenbosch University says the collapse of SVB and the subsequent failure of another bank with a third one entering liquidation, reverberated through global financial markets.
Stock and bond markets continued to experience wild swings after Switzerland’s second-largest bank, Credit Suisse, which has been rocked by several scandals in recent years and was already under pressure before the collapse of SVB, suffered further losses amid contagion from the US banking concerns and an adverse auditor report.
This further spooked markets, especially after Credit Suisse was sold to the Bank of Switzerland. The BER says the need to support financial stability already led US authorities, including the central bank, to step in to secure the deposits of SVB clients.
Financial institutions may ‘voluntarily’ tighten credit lending standards in the wake of the collapse of SVB, which means that the central bank may need to do less to temper inflation and risks overtightening should it proceed on its previously stated trajectory.
Andre Reichel, global sector specialist for financials at Schroders, says three years ago, SVB was a relatively small bank, but its balance sheet tripled very quickly as a result of the money flowing into the tech and venture capital sectors during the pandemic, but the mindset of management did not keep up with the fact that the bank had become a very different, much larger, business in a short space of time.
“It is too soon to say if the crisis is over. Some banks may still be vulnerable but, importantly, a backstop is now in place. Even if another smaller bank fails, the wider system is protected. What we will see is that some of these smaller banks will rearrange their business models to reduce the risk of a similar situation unfolding.”
The collapse of SVB demonstrates how sharply rising interest rates are uncovering weaknesses that were previously hidden by the low-rate environment.
The Fed will set new rates in the next day or two and while a 50-basis point increase had been on the cards amid still-elevated inflation, the failure of SVB may change that.
Keith Wade, chief economist and strategist at Schroders, says the Fed will be keen not to make the current situation worse and could, therefore, pull back from significant tightening but the difference between now and the Global Financial Crisis in 2009 is that inflation is a problem now.
“That constrains what the Fed can do, given that bringing inflation back to target has to be the key focus.”
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