The collapse of SVB, the biggest bank failure since 2008, has reverberated around the world. What is being done to limit the fallout?
ADVERTISEMENTThe collapse of Silicon Valley Bank (SVB), the biggest bank failure since 2008, has sparked alarm across the world as governments try to assess its impact on tech start-ups, other financial institutions and even pension funds.
On Monday, US president Joe Biden assured Americans the nation’s banking system was safe, telling them: “Your deposits will be there when you need them".
US regulators announced steps on Sunday to protect customers and prevent more bank runs after they seized and shut down another struggling lender, crypto-friendly Signature Bank.
While SVB was the go-to lender for Silicon Valley venture capitalists and tech firms, including Etsy and Roblox, it also helped fund companies on the other side of the Atlantic, leaving them scrambling to figure out how to access their deposits and manage their finances.
Is Europe at risk of contagion?
SVB’s collapse has pummelled European bank stocks, despite assurances from Biden and other policymakers.
Paschal Donohoe, the head of the group of eurozone finance ministers known as the Eurogroup, said on Monday that Europe had “no direct exposure” to SVB.
Earlier, the EU's economy commissioner said the US bank's collapse did not pose a serious threat to Europe’s financial stability.
"I don't think we have a real risk of contagion at the moment in Europe," Paolo Gentiloni told reporters in Brussels, adding that the EU was "monitoring the situation in close contact" with the European Central Bank.
Antonio Fatas, Professor of Economics at INSEAD business school, said he didn’t see a systemic risk in Europe yet either from SVB’s collapse.
“The fundamental difference is the type of regulation and stress tests that we do in Europe are more strict,” he told Euronews Next.
In the US, when the Trump administration loosened regulatory requirements for regional banks in 2018, SVB found itself exempt from the strict liquidity regulations that were imposed on banks deemed “systemically important” in the wake of the 2008 financial crisis.
The changes effectively left SVB and other medium-sized banks as too small to be deemed "systemically important" and worthy of heightened scrutiny - yet clearly big enough to cause a market panic when they go bust.
“I think in Europe, we're a little bit more systematic when it comes to regulation. I think that's good news,” Fatas said.
“I think, unfortunately, banks have to be heavily regulated. That's the reality. Otherwise, we end up with one crisis after another”.
The Biden administration’s intervention and protection of deposits above the normal limit of $250,000 (€233,000) was the right thing to do and “the only way to stabilise the banking system,” Fatas said, adding he would expect authorities in Europe to do the same if a bank run were to happen.
“I know some people are very much against anything that looks like a bailout intervention of governments, but we do this every crisis,” he said.
“We always complain and we make a lot of noise. But at the same time, this is life when there's any risk to the banking system”.
What about SVB’s European branches?
SVB had branches in the UK, Denmark, Germany, Sweden and Israel. So, what are these countries doing to limit the fallout?
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Early on Monday, the British government announced a deal had been struck with HSBC, Europe’s biggest bank, to take over SVB’s UK subsidiary for just £1 (€1.13).
The last-minute deal, negotiated over the weekend, secures deposits worth more than £6.7 billion (€7.6 billion) in a bid to protect the country’s tech sector.
Jeremy Hunt, the UK’s Chancellor (or Treasury chief), said that without this move, some of the nation’s leading tech companies could have been “wiped out”.
All of SVB UK services will continue to operate as normal and customers should not notice any changes, a statement said. The UK Treasury said no taxpayer money went into the sale.
Germany
On Monday, Germany’s financial regulator, BaFin, prohibited asset disposals and payments by SVB’s German branch and imposed a moratorium, effectively shutting it for dealings with customers.
ADVERTISEMENTIn a statement, BaFin stressed that the German branch does not constitute a threat to financial stability. It also said SVB’s German branch was responsible for lending but did not run a deposit business in the country, so deposit insurance is not an issue.
Sweden
Sweden’s largest pension fund, Alecta, said on Monday it faced losing as much as 12 billion krona (€1.06 billion) it had invested in SVB and Signature Bank, but that its position remains “very strong”.
The collapse of both banks does not threaten Sweden’s financial stability, the country’s banking watchdog said.
Alecta was the fourth-biggest shareholder in SVB Financial Group at the end of last year, according to Dow Jones. While the bank’s depositors are expected to be able to access their funds thanks to the US government’s intervention, its shareholders are being wiped out.
Alecta is also a major shareholder in Signature Bank, which also failed, as well as in First Republic, which has seen its shares tank in recent days.
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In Israel, home to a vibrant high-tech industry, hundreds of companies could be exposed to SVB’s collapse, and the government hasn’t ruled out stepping in to prop them up.
Speaking at a Cabinet meeting on Sunday, Prime Minister Benjamin Netanyahu said he and senior Israeli officials would consider “whether or not actions are necessary to assist Israeli companies in distress, mainly with cash-flow, due to the collapse of SVB”.
Is there any equivalent to SVB in Europe?
Part of what made SVB so special was it became the go-to bank for tech start-ups and venture capitalists. But experts say that dominance was very specific to the US.
“I cannot think of a bank that is so specialised in a sector in Europe,” said INSEAD’s Fatas, who said the panic on the market was “a little bit overdone”.
“The banks that I can think of, the large banks or medium-sized banks that I can think of in Europe, typically are very diversified. They don't look like this”.
ADVERTISEMENTRight now, the stock market is “really punishing banks,” Fatas explained, because banks in Europe also hold government bonds that have lost value as interest rates went up, and investors are now questioning banks’ profitability just like in the US.
“I think this is just a standard reaction to what has been a surprise and the shock of what happened in the US. I think if you give it a few days, I think we'll be in a better place in Europe”.
While this greater diversification may protect Europe’s banking system, the collapse of SVB has spooked investors across the board, meaning funding for start-ups risks further drying up.
“Funding is going to become a little bit more conservative for sure,” Fatas said.
