The big news affecting the financial markets today is the bankruptcy of Silicon Valley Bank (SVB) in the USA. In short, it is the case that accounting rules allow that Bonds which are considered to be owned until maturity do not need to be accounted for at market price. This means that when interest rates rise and the price of the bonds falls, this will not appear in the bank's accounts, until the bank eventually has to sell these bonds. When the liquidity situation of SVB meant that they had to sell some of these bonds, at a loss, it suddenly became apparent that if they had to sell the entire holding of bonds, the losses were so great that the bank was in reality bankrupt.
In the last couple of days, this case has revived memories of what happened when Lehman Brothers was declared bankrupt in 2008. The financial market is now searching diligently to find out whether there are other banks that are in danger of suffering the same fate as SVB, and this leads to great uncertainty in the short picture. And uncertainty often leads to fall in share prices.
Now we should not anticipate the course of events, and dismiss the possibility that a similar incident could affect other banks, but must point out that there are many differences between this situation and what we saw in 2008.
Firstly, the vast majority of banks are much better capitalized now than in 2008. Before the financial crisis, it was the case that banks were both allowed to operate with very little equity, but also that long-term loans could be financed by short (unsecured) deposits. Now the banks are not without risk even today, but it is important to point out that since then the banks have been required to both improve the risk management of lending/deposits, but also require significantly more equity capital. In principle, this means that the banks can tolerate more losses in the portfolio.
In addition to the above, it must be said that SVB was a niche bank, with a lot of lending to start-up companies. These companies typically have little earnings today, but likely earnings in the future. In addition, SVB had much of its balance sheet in bonds with long maturities. These bonds carry higher risk and fall more when interest rates rise. The risk in SVB as a bank must therefore be considered to have been significantly higher than most other banks.
In addition, we see today that the authorities guarantee the depositors in SVB, which should reduce the risk of people withdrawing their money from the banking system. The fact that the authorities are acting so quickly this time, and removing what is considered to be the biggest risk (that all depositors withdraw their money), should reduce the risk of contagion significantly.
As usual, it is always difficult to predict the final outcome of events like this, and often it blows over as quickly as it started. We think the most important thing is to be well diversified.