Silicon Valley Bank deal soothes broader markets, but default stress haunts banks

ITR filing

Large portions of Silicon Valley Bank’s deposits and loans found buyers on Monday, which helped stabilise the shaky markets that had been shaken by concerns about a credit crunch and systemic bank stress.
The Federal Deposit Insurance Corp received equity appreciation rights in First Citizens BancShares Inc’s stock worth up to $500 million in exchange for buying all of SVB’s loans and deposits, the FDIC said in a statement.
On Monday, 17 former SVB locations will become First Citizen locations. First Citizen purchases SVB assets worth roughly $72 billion at a discount of $16.5 billion, while the FDIC estimates that SVB’s failure will cost the deposit insurance fund about $20 billion.
First Citizens, a firm situated in North Carolina, stated in a statement that it did not purchase any further loans or assets from SVB Financial Group, the previous parent company of Silicon Valley Bank.

The agreement has provided markets with some relief since it was the first weekend in a number of weeks without reports of new bank failures, rescue agreements, or urgent government assistance to restore trust.
The bigger difficulty is insuring deposits at all those other (regional) banks, said IG Markets analyst Tony Sycamore in Sydney. “You brush Silicon Valley off to another buyer, which is wonderful,” he added.

It’s a brief period of quiet before the upcoming storm.

Indicators of financial market stress were flashing towards the end of last week, and Germany’s largest lender, Deutsche Bank, was under fire. Its shares fell by 8.5% on Friday, and the cost of insuring its bonds against failure increased significantly.

Asia’s bank shares were divided on Monday, remaining stable in Australia and Tokyo but falling in Hong Kong, where shares of Standard Chartered sank 4%.

European futures increased 1%, while S&P 500 futures increased 0.5%.

Little more than two weeks after SVB’s collapse, the effects can be felt all over the world. U.S. depositors are moving to larger cousins from smaller cousins as a result of the confidence blow, and Credit Suisse this week was obliged to join rival UBS.

Investors are on edge as the Stoxx index of European bank shares is down more than 18% and the KBW regional bank index in the United States is down 21% in March.

In an interview that was published on the bank’s website, Australia and New Zealand Banking Group Chief Executive Shayne Elliott stated that the situation was “obviously not over” and warned that it would worsen into a more serious financial catastrophe.

Elliott argued that it was impossible to say, “Oh, that’s all done, Silicon Valley Bank and Credit Suisse and, you know, life will go back to normal.” “These things usually happen slowly over a long time.”

Questions have been raised about whether major central banks will continue to pursue aggressive interest rate hikes to control inflation and whether tighter lending will harm the global economy in light of the abrupt increase in tensions for banks.

Credit default swaps, or the price of insurance against defaults, are uncomfortably high in Europe and bank bonds are under pressure. Data from S&P Global Market Intelligence showed that on Friday, Deutsche Bank’s five-year CDS reached its highest level since late 2018.

Focus is on depositors’ confidence in regional bankers, which may be harmed by an SVB sale. In the US, where money market fund flows have increased by more than $300 billion in the past month to a record high $5.1 trillion, this confidence has increased significantly.

After searching for a buyer for several weeks and the FDIC requesting separate offers for SVB Private and SVB, the SBV sale finally materialised.

The FDIC still has securities for sale worth almost $90 billion, according to the report. First Citizens stated that it plans to expand in California more quickly and wants to build on SVB’s venture capital operation.

According to Rabobank strategist Michael Every, “effectively you’re going to have a combination of carrots, sticks, and acronyms to ensure you get the outcome you want and that permits (authorities) to still use interest rates to combat inflation.”

This appears to be crucial to that.