Silicon Valley Bank (SVB) collapsed a few days ago due to a bank run. A lack of diversification meant that a lot of customer deposits were tied up in bonds. Though typically a safe investment, soaring inflation and rising Federal Reserve rates have meant the value of these bonds fell significantly.
Such public news affects traders that operate with Plus500 Futures Trading or other platforms, as an existential threat was posed to the future of banking. This was the biggest bank failure since 2008, and although deposit insurance is being paid out, there will be many knock-on effects from the SVB failure. Here are 4 impacts that the failure will have.
Tech start-ups hit the hardest
Technology start-ups that have banked with Silicon Valley Bank (SVB) are scrambling to withdraw deposits and diversify banking relationships as they seek to mitigate risks associated with the collapse of the lender. For a variety of reasons, SVB was very popular with start-ups, so it is them that have been hit particularly hard. And, given their rush to withdraw money during the difficult economic climate, they were part of the cause of the bank run.
Many start-ups and venture capitalists credit SVB with being more willing to lend to new businesses than larger banks and say the lender’s close relationships with borrowers are likely to be more sparse in the future. One UK-based venture capitalist said very few start-up loans were made without SVB calling up investors to gain an understanding of the business. Some venture investors urged start-ups they had funded to withdraw deposits, thus being a catalyst for the collapse.
Housing markets
Skylar Olsen, Zillow’s Chief Economist, recently commented on how the SVB collapse could have an impact on the housing market. Olsen believes that the response to this collapse may be to bring down mortgage rates, bringing a short-term boost to the market. Ultimately, this would mean a rethinking of the Fed’s strong rate increases that arose a few weeks ago.
Lower rates would inevitably be a boost for home buyers, who are currently struggling with the ~7% rates currently. Though, SVB’s collapse may highlight deeper issues, and this could cause a bigger recession than expected – which may further decrease rates. But, it could also cool property prices in areas like San Francisco Bay Area, according to Olsen, where tech employment and stocks have an overrepresented effect.
EU policymakers scramble
EU policymakers are pushing for tighter rules on dealing with failing lenders following the collapse of Silicon Valley Bank in the US. Big events understandably increase the urgency of Brussels’ policymaking. Eurozone finance ministers said the collapse highlights the importance of Europe in its endeavor to regulate banking, as no one can ever be absolutely sure where the next risk can come from.
Paschal Donohoe, the Eurogroup’s president, said “the biggest antidote” to this risk was to accelerate work in strengthening EU rules regarding failing lenders. Brussels has been working on draft legislation on crisis management for banks, which was expected earlier this month but has been delayed. The EU’s own legislative proposal on crisis management and deposit insurance is expected to move forward quite soon.
Conspiratorial explanations spark more culture wars
The collapse of Silicon Valley Bank (SVB) has sparked a global conversation on what’s going wrong and what we need to do to prevent a crisis in the future. However, amidst the blame game, several false narratives are emerging.
Of course, an unsurprising result of the collapse has been fuel in the current ongoing culture war, where both the left and right use an event in their favor to score ideological points. One side blames ESG, whilst the other side points to lax regulation and corporate cronyism.
The discussion has also led to some eyebrow-raising claims about how it’s a ploy for the government to begin nationalizing the banking industry. This conspiracy is suggesting that risk management is purposely being thrown out the window as bailouts will become the means to an end.
Many false narratives confuse the public, and it’s been an increasing issue ever since the Trump era of fake news. As Vivek Ramaswamy puts it in his WSJ opinion piece, “ignore Silicon Valley fear-mongering about bank runs. This is a case of bad risk management”.
The collapse of SVB is a political problem, but it is not an economic problem. Economic issues can seemingly no longer exist in a vacuum but must be a part of the battleground that the culture war is being fought on.
The SVB bank run was a catastrophic failure of poor risk management. Its implications will be far-reaching as we see the EU scramble to use it as a tool of policymaking. Economic impacts will be felt around the world too, but mostly within the US start-up scene, as well as potentially the housing market.
