The collapse of Silicon Valley Bank has stunned the banking industry

The speed of the SVB crash surprised observers and stunned markets, wiping out more than $100 billion ($152 billion) in market value for US banks in just two days.

“Banks are opaque, so we all immediately think, ‘Wait a minute, how closely is this bank connected to another?'” said Mayra Rodríguez Valladares, a financial risk consultant who trains bankers and regulators. “Investors and depositors don’t want to be the last to turn off the lights in the room, so they have to leave.”

stricter rules

Several experts said any impact on the rest of the banking sector could be limited. Larger institutions have more diverse portfolios and customer deposits than the SVB. The SVB also had a high dependency on the start-up sector.

“We don’t think there’s a risk of contagion to the rest of the banking sector,” said David Trainer, chief executive of New Constructs, an investment research firm. “The big banks’ deposit base is much more diversified than at SVB and the big banks are in good financial shape.”

Jason Ware, chief investment officer at Albion Financial Group, said ties to the broader banking system are limited, but “this situation may have implications for select regional banks with some direct exposure.”

Other experts said the failure could help US regulators’ efforts to tighten regulations.

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The banking sector weathered the COVID-19 pandemic, thanks in part to stricter rules imposed after the 2008 global financial crisis. However, some rules were relaxed during President Donald Trump’s administration. Those simpler rules for regional banks are likely to come under scrutiny as regulators want to make sure they, too, have enough cushions to weather similar stresses, some regulator and industry sources said.

US banking regulators said in October they are considering new requirements for large regional banks, including holding more long-term debt to weather losses.

“It feels like the market is looking first to regional banks that don’t have credit diversification,” said Greg Hertrich, Nomura’s head of US depository strategy.

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Another requirement that could attract more attention, according to industry sources, was the expansion of which banks are required to take into account the market value of the securities held. This requirement only applies to banks with assets greater than US$250 billion (US$380 billion), but could be extended to other companies.

On Monday, FDIC Chairman Martin Gruenberg warned bankers gathering in Washington that companies are facing higher unrealized losses as rapid interest rate hikes have pushed the value of longer-dated securities lower.

“The good news on this subject is that banks are generally in strong financial shape… On the other hand, unrealized losses weaken a bank’s future ability to meet unexpected liquidity needs,” Grünberg said, three days before the SVB announced its need to fundraising announced.

– Reuters

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