- All eyes are on the US financial sector as shock waves from SVB's implosion hit the banking system.
- The bank's collapse has raised questions about a 2008-style crisis and how the Fed will respond.
The stunning collapse of Silicon Valley Bank has sent shock waves across the whole US financial system.
The go-to lender for startups was shut down Friday by regulators and put under the control of the Financial Deposit Insurance Corporation, marking the biggest bank failure since 2008. That capped a turbulent week that saw a botched fundraising attempt by Silicon Valley Bank (SVB) and a $1.8 billion loss on its bond holdings, which ultimately triggered an old-fashioned bank run.
SVB's meltdown was quickly followed by the implosion of New York-based Signature Bank and a crash in the share prices of regional US lenders including First Republic and Western Alliance. Stock market volatility surged while bond yields plunged on expectations the Federal Reserve will halt its interest-rate increases in view of the risk to financial stability.
As ripple effects from SVB's collapse spread across the world of finance, investors are frantically searching for answers to what it all means for the key pillars of the economy - from the stock market to the banking sector and the Federal Reserve's interest-rate policy.
Here's everything we know about these critical questions as of now.
How will SVB's collapse affect the banking sector?
Silicon Valley Bank's collapse exposed a serious risk many banks face in their business portfolios – the dependence on uninsured deposits.
Thanks to the tech boom over recent years, SVB's deposits ballooned. A bank might normally use such funds for lending, but SVB decided to park the cash in long-dated bonds. That proved a bad bet as a surge in interest rates over the past year saw the debt holdings plunge in value, leaving a gaping hole in the lender's balance sheet.
Analysts are worried SVB isn't the only bank that's sitting on billions of dollars of bond losses. William Isaac, the former chairman of the FDIC, has warned of the risk of a string of lender collapses in what could lead to a 1980s-style banking crisis.
Such fears have fueled a tumble in the share prices of regional US banks including First Republic, Western Alliance and PacWest Bancorp.
However, former Treasury chief Larry Summers took a less pessimistic view, saying SVB's collapse was "unlikely to be a broadly systemic problem." Meanwhile, the CEO of Capra Bank has said SVB's failure could actually boost Americans' confidence in the financial system.
Does this raise the risk of another financial crisis?
SVB's downfall is a big deal, no doubt. The size of its failure has only been exceeded once in American history – by Washington Mutual when it collapsed in 2008.
But as bad as it is, it's unlikely to trigger a repeat of the 2008 global financial crisis that set the stage for the Great Recession, according to analysts. That's because the current financial landscape has evolved a lot since then.
Today, the US has more stringent banking regulations meant to protect the industry should it face more turmoil. This includes increased capital requirements, which ensure banks have sufficient reserve levels in times of crisis. While those regulations didn't cover SVB – in part due to a law passed by the Trump administration – they still apply to the 12 largest US banks.
"SVB isn't Lehman, and 2023 isn't 2008. We probably aren't looking at a systemic financial crisis. And while the government has stepped in to stabilize the situation, taxpayers probably won't be on the hook for large sums of money," Nobel Prize-winning economist Paul Krugman wrote in a New York Times column.
Mike Coop, chief investment officer for EMEA at Morningstar Investment Management, also suggested that the demise of SVB is unlikely to trigger anything like the financial crisis the world faced 15 years ago.
But of course, not everyone agrees. Economist Nouriel Roubini, who earned his nickname, "Dr. Doom" for predicting the 2008 financial crisis, has said SVB's collapse poses the risk of "global contagion," per Newsweek.
What does it mean for the stock market?
The SVB turmoil spooked the stock market over the past week, with financial shares leading a broader selloff. Wall Street's so-called "fear gauge" - Chicago Board Options Exchange's Volatility Index or VIX - hit a four-month high Monday as a wave of uncertainty engulfed financial markets.
However, the market has regained much of its poise since then, as the view that the lender's collapse is unlikely to spiral into a systemic crunch gains credence. The VIX has fallen back and the S&P 500 of US stocks has bounced off Monday's lows.
It's still early to say whether the crisis has blown over, but there are those who think this could turn into a positive for the stock market.
Threats to financial stability raised by SVB's demise could force the Fed to halt its most aggressive monetary-tightening campaign since the 1980s, or even reverse course, according to some experts.
Given that the central bank's interest-rate increases were a key reason for declines in risk assets over the past year, the Fed pivoting away from that policy could be a good thing for stocks. Lower rates tend to cut funding costs for companies, boosting their finances and in turn, their stock-market valuations.
Fundstrat's head of research Tom Lee said that while SVB's failure could hit stocks in the near term, US equities could experience double-digit gains this year.
How will the SVB fiasco affect the economy?
While a 2008-style crisis may be off the table, SVB's downfall could still have implications for the US economy.
It could hurt the confidence of investors and depositors. And that could weigh on stocks and subsequently economic performance, given capital-market buoyancy is key to economic growth.
Also, increased risk aversion among banks may slow lending, which could also hamper economic activity, analysts have said, per MarketWatch.
Still, the mood among experts on US economic prospects remains generally optimistic even after SVB's failure.
"I will not be surprised to see a few more victims before the dust settles, but there is no particular reason that this turmoil necessarily has to result in a sharp economic hit," chief economist Stephen Stanley of Santander Capital Markets told the outlet.
What impact will it have on interest rates?
When Jerome Powell warned earlier this month the Fed was prepared to deliver bigger interest-rate increases, policymakers were likely unaware of how vulnerable some US banks were.
As of last week, investors were pricing in a 50-basis-point rate hike at the Fed's March 21-22 meeting, but those expectations are fading away in the wake of the SVB debacle. Wall Street banks including Goldman Sachs have already predicted a pause in rate hikes following the developments concerning SVB.
"In light of recent stress in the banking system, we no longer expect the FOMC to deliver a rate hike at its March 22 meeting with considerable uncertainty about the path beyond March," Goldman's chief global economist Jan Hatzius said in a note to clients.
Market experts including Mohamed El-Erian and Larry McDonald have echoed the view. While El-Erian said the Fed will be forced to surrender its monetary-tightening campaign, McDonald said the central bank could even cut rates by 100 basis points.