Vontobel Multi Asset Boutique

Central bank tightening begins to claim its first victims: isolated case or systemic risk?


Mario Montagnani

Senior Investment Strategist

Meet Mario

| Read | 3 min

SVB was founded in 1983 in Santa Clara, California, in the heart of the Silicon Valley. With over 200 USD billion in AuM by end 2022, the bank was the 16th largest in the country and has long focused on higher-risk start-ups operating in the
technology and life sciences sectors. According to SVB, by end 2022, nearly half of all US venture-backed start-ups were using its services.

The problems began on Wednesday, March 8, when SVB announced that it was facing liquidity issues when customers withdrew cash in a big way. The anomaly was that SVB – according to the press – was not hedging risk on its security portfolio. This led to the forced sale of US government bonds held in their books before their maturity, which resulted in a loss of almost 2 USD billion. To strengthen its capital position, SVB announced a 2.25 USD billion share sale. This announcement triggered panic throughout the Valley, with many companies rushing to withdraw their money.

SVB’s share price fell by 60 percent on Thursday, March 9, and trading was halted on Friday, March 10, morning. At midday, the Federal Deposit Insurance Corporation (FDIC) took control of the bank. The only bank failure bigger than this in US history was that of Washington Mutual, which had about over 300 USD billion in customer deposits before the 2008 financial crisis.

Meanwhile, another small commercial US bank – Signature Bank in New York – was closed on Sunday, taken over by its state regulator, with deposits in the amount of 89 USD billion.

Why the panic?

SVB's forced sale of bonds before their maturity to meet customer withdrawals, and thus the realization of losses, sparked contagion across the entire banking sector. SVB’s heavy losses on its bond portfolio immediately focused investors’ attention on the potential risks that might lurk in bond portfolios held by other financial institutions, both in the United States and in Europe.

US, more than 100 USD billion worth in market capitalization were wiped from the largest US banks.

Chart 1: More than USD 100 bn market cap wiped from the 24 largest US banks




The four biggest US banks lost more than 50 billion US-dollars in market value on Thursday, March 9, and Friday, March 10, alone. Regional banks – in particular commercial US banks – have been penalized more than larger ones.

Chart 2: Regional (commercial) banks have been heavily penalized vs. larger ones



Intervention of the US regulators

Over the weekend, US regulators announced emergency measures to ease fears depositors might pull their money from smaller lenders.

The Fed announced broadened access to the Fed's discount window and set up a new facility to ensure additional funding and liquidity available to all eligible banks. Put simply, banks can sell their Treasury bonds and MBS to the Fed at par and receive cash in return without incurring losses, which is exactly the dynamic that caused SVB to collapse.

The FDIC’s standard insurance covers up to USD 250,000 per depositor, per bank, for each account ownership category. However, in the case of SVB, the US central bank said all clients will be able to recover their funds, even those exceeding USD 250,000.

According to a senior Treasury official, “there are other banks that appeared to be in similar situations to SVB and Signature”. This might well add further speculation and weigh on sentiment in the near term.

This is clearly noticeable in the sharp increase in Put Open interests for US regional banks, now at 24 months high.

Chart 3: Speculations grind higher on US regional banks



What about European banks? European banks were not immune to SVB’s fallout and adverse sentiment on the banking sector, resulting in a selloff.

Chart 4: European banks suffered from negative sentiment too



Systemic risk ahead, banking crisis or an isolated case?

The incident at SVB raises questions about liquidity issues across the overall banking sector. So, is there a bigger problem out there? We do not believe so. The issue is clearly linked to the small, highly specialized, bank segment, which
might experience tougher liquidity and funding issues than the more diversified, larger one.

In short, we tend to look at SVB as a company specific and isolated case rather than a systemic one. The company difficulties are / were mostly linked to its balance sheet peculiarities that most other banks luckily do not share.The risk management of the company is probably to be questioned, with interest rates risks not being hedged. As a matter of fact, large US banks display solid liquidity and capital positions, and sound risk management. Even more so in Europe where regulations are even tighter than in the US.

It is worth mentioning that in its report this month, the Fed had stated that the big banks “have ample liquidity to meet even large deposit outflows”. In detail, for the big three US banks, the deposit base is huge and for some significantly larger than loans.




Mario Montagnani

Senior Investment Strategist

Meet Mario