Uncertain Aftermath of SVB Failure Has Hints of the Past

Investors are looking backward for answers, following Silicon Valley Bank’s mid-March collapse, the largest such U.S. failure since 2008. Meantime, they are wondering what to expect next, according to CNN.

Similarities to the 2008 global financial crisis exist, writes Nicole Goodkind, but the differences are more compelling. Assets such as mortgage-backed securities that were difficult to value, caused the crisis in 2008. With the SVB failure, the problematic assets, U.S. Treasuries and bonds, are easy to value and sell. Government intervention in such a situation, such as guaranteeing customer deposits and restoring confidence as has been done, can be more effective, said Goodkind.

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“Compared to 2008, the system is more transparent, with a more solid foundation, and the government has identified the remaining problems and put programs in place to deal with them,” Brad McMillan, Chief Investment Officer for Commonwealth Financial Network, told CNN.

Shares of regional and large banks fell after the SVB shutdown, though, indicating concern.

“This is bad news for U.S. bank shareholders,” wrote BlackRock analysts in a note. “We see knock-on effects for the economy — reinforcing our expectation of recession.”

Investors are also turning toward the late-1980s Savings and Loan crisis as an indication of what the future may look like. S&Ls specialized in accepting savings deposits and making mortgage loans. After they were deregulated, they began making risky investments with depositors’ money, just as the Federal Reserve was raising interest rates. Borrowers couldn’t afford to pay back their loans, so many S&Ls went under, requiring the government to bail them out.

“If anything, this appears to be a typical bank failure like we saw during the Savings & Loan crisis,” wrote Jaret Seiberg at TD Cowen. “The only difference is that we are dealing with a bank that focuses on technology rather than on real estate.” Regulators have steered banks away from short-term investments “for the very reasons that appear to have brought down Silicon Valley Bank,” Seiberg said.
Though the future may be uncertain, investors expect the government to review central bank policy and regulation in the immediate aftermath of the SVB failure.