The fall of the Silicon Valley Bank, what consequences for investments?

The march 16, 2023

Since Friday 10 March, the global banking system has been in turmoil. What happened in the United States? What are the risks for European banks and for savers? Here are a few elements of understanding.

The fall of Silicon Valley Bank

Since last week, the financial markets have been in turmoil. What happened?

Unlike the collapse of Lehman Brothers, where the main problem was the holding of "toxic" assets, the reason here is quite different. Indeed, this liquidity crisis encountered by the SVB (Silicon Valley Bank) is the indirect consequence of the increase in rates that we have been experiencing since last year. Moreover, as the bank's portfolio is mainly composed of tech companies with large deposits, the dependence on this sector was far too great.

When the start-up funding bubble ended, customers made fewer deposits. When they wanted to recover their cash to finance their development, instead of taking on debt because of the higher rates, the bank was forced to sell its assets. Unlike Lehman Brothers, the investments were sound as they were mainly good quality, fixed rate, 10 year bonds. The lack of interest rate hedging and the lack of anticipation forced a massive and brutal sale of its investments at a loss. The raising of capital to cover the 1.8 billion dollar loss drew attention to the depreciation of their assets, which led to major withdrawals by depositors, who were encouraged to do so by venture funds.

This was the start of the "bank run" which was only interrupted by the closure of the bank and the implementation of a guarantee for all deposits.


What consequences for the European banking system?


As the American banks do not apply all the prudential rules of the Basel III agreements that European banks are obliged to respect, the solidity of the banking system is not called into question. The main effect on the market is the reawakening of fears about Credit Suisse, a Swiss bank that has been going through a difficult period for the past two years, a complicated restructuring that began last year and a wave of departures and massive withdrawals by its clients. The CHF 50 billion loan from the Swiss National Bank allows the bank to organise the current reorganisation more serenely and to stabilise the European stock exchanges and the banking groups listed on them.

These events show the complexity and multitude of factors that need to be understood in order to invest well. Asset allocations and investment vehicles must be carefully chosen to meet your needs. Wealth A7, which has been in business for over 15 years, can advise you on this, contact us!

In a changing world, Wealth A7 is there to bring your desires to life.


Article by : STEPHANE SAES

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