Right now - I would suggest a positive outcome for Europe.........USD has weakened, the US looks closer to the end of its rate hiking cycle........the period of the US exporting its inflation to the RoW via exchange rate strength looks done now.......the Euro can likely strengthen now against the dollar and a basket of currencies which should help ease inflationary pressures here.
Silicon Valley Bank collapse
- Thread starter MrEarl
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Right now - I would suggest a positive outcome for Europe.........USD has weakened, the US looks closer to the end of its rate hiking cycle........the period of the US exporting its inflation to the RoW via exchange rate strength looks done now.......the Euro can likely strengthen now against the dollar and a basket of currencies which should help ease inflationary pressures here.
NoRegretsCoyote
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Indirect contagion perhaps.
But EU banks generally don't have the kind of concentrated depositor base that SVB does.
I still don't understand why more than half of the liability side was non-interest bearing demand deposits. What was so appealing about zero interest rates in SVB at a time when interest rates are in general positive?
It wasn't limited to SVB bank though the issue of exposure to low interest rate government bonds. Therefore If they hadn't stepped in to guarantee all the deposit holders the contagion would have spread.
Then other banks throughout the world would start selling off their government bonds to reduce their exposure, that would cause bond prices to collapse and a very difficult situation for governments like our own looking to roll over maturing debt. Governments have been the big beneficiaries of this protracted zero interest rate environment. All the banks that bought irish government bonds in 2020 are also under water with these if they were to sell them on the market now
Then other banks throughout the world would start selling off their government bonds to reduce their exposure, that would cause bond prices to collapse and a very difficult situation for governments like our own looking to roll over maturing debt. Governments have been the big beneficiaries of this protracted zero interest rate environment. All the banks that bought irish government bonds in 2020 are also under water with these if they were to sell them on the market now
Absolutely. Government-supported high roller gambling!
I see the Fed has also allowed unlimited funding for other banks that might find themselves in a similar position. What they want to prevent is other banks being forced to sell government bonds. In other words aswell as protecting the banks they want to shore up the government bond markets from further price falls
SVB requested borrowing customers to also place deposits with them, as part of a an attractive package.
See here:
DublinHead54
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You're assuming these tech firms all have CFO and that all their money is tied up in SVB.
The stats I'm seeing indicate of the larger piblic firms impacted it represents, 10-30% of cash.
It's the smaller early stage tech firms that are most impacted. It appears that they used SVB for all their working capital, so I don't think a CFO should be punished for using a top 20 bank that was in regulatory compliance.
If they had excessive deposits, they could have deposited with the FED. They chose Fixed rate bonds and MBS, in the chase for yield.
And it looks like they were right, HTM assets redeemed at par? (Edit: assets can be borrowed against, not redeemed, at par value. But still, hardly encouraging sound risk management.)
In addition, my rudimentary understanding of the supervision rules are that the unrealised losses that SVB were realising, are already built into CET1 capital, so Euro banks generally have better liquidity and capital ratios.
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What does this mean?
Are you saying that euro banks like the Irish banks are writing down the value of their government bond portfolio to market values rather than face value as their prices fell?
Maybe I don't have that strictly correct but it seems that only the systemically important US banks, of which SVB wasn't one, are held to the Euro equivalent rules. The main point being better liquidity and capital ratios in Europe based banks.
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Europe's banks unlikely to get hit by bond portfolio losses - Moody's
European banks are unlikely to find themselves compelled to liquidate their bond holdings at a loss like their U.S. peer Silicon Valley Bank (SIVBV.UL), Moody's Investors Service said on Monday.
www.reuters.com
SVB Collapse Has Little Bearing on Europe’s Banks, Analysts Say
Analysts are confident there’s not an SVB Financial Group lurking among European banks. That didn’t stop investors from selling.
webcache.googleusercontent.com
In the reuters article it says that the European banks bond portfolio will tend to return to par value as the bonds mature. Also a third of their government bonds will be maturing in the next 2 years. But that still means that the majority of their bond portfolio will be maturing later than 2 years. Therefore the article actually doesn't make sense because their bond portfolio can't be valued at close to par value since most of their portfolio matures from 2 years and upwards.
The repercussions from all this is that the banks will want to reduce down their government bond portfolio and could start Lobbying the regulators to reduce the requirements to hold so much government bonds since they have now proven to be far from safe assets in a rising interest rate environment
The repercussions from all this is that the banks will want to reduce down their government bond portfolio and could start Lobbying the regulators to reduce the requirements to hold so much government bonds since they have now proven to be far from safe assets in a rising interest rate environment
Joe, help me here. What regulation exactly requires banks to hold unhedged, long dated, fixed rate Government bonds?
The repercussions of this are some banks will be encouraged to diversify their assets and/or funding. Having all your assets in one class and all your funding from a small pool of informed depositors isn't a great recipe
But to say that government bonds was the sole cause of this is an oversimplification.
But to say that government bonds was the sole cause of this is an oversimplification.
Nobody is saying they were the sole cause of this , Obviously the banks own mismanagement was key. However the issue of banks needing to hold government bonds as part of their liquidity and the overvaluation of those bonds driven by the world's central banks for years cannot be ignored as a major contributory factor.
Bonds were supposed to be a safe liquid asset which was a key reason they were included in this. If banks need to hedge their bond exposure because of rising interest rates well then it would drive down the price of those bonds further as the cost of hedging also needs to be included in the pricing. This calls into question the requirements of banks to hold those bonds.
Governments by and large issue long dated bonds because they also want certainty. If all the banks refuse to buy long dated bonds because of their risk in a rising interest rate environment then that would push interest rates up further. Then the central banks come in buy those bonds and push back down the interest rates, that's what's been happening since the financial crash
They weren't overvalued they just changed in value because the discount rate (fed rate) changed. There is no mystery or suprise here this is how bonds work. But no one in SVB seemed to understand this.
Government bonds are favoured because they are liquid - probably less risky then other financial assets but that's different to safe. Their value will fluctuate with the discount rate. They are meant to be easily sellable so banks can realise funds quickly. I don't think anything here has called that into question. I don't believe bond prices moved dramatically when svb "flooded" the market with it's holdings. The fire sale didn't depress the market, the market remained liquid. The issue here is the bank was overexposed to one assets class, government bonds. Their holdings likely went well beyond any regulatory requirement.
Government bonds are favoured because they are liquid - probably less risky then other financial assets but that's different to safe. Their value will fluctuate with the discount rate. They are meant to be easily sellable so banks can realise funds quickly. I don't think anything here has called that into question. I don't believe bond prices moved dramatically when svb "flooded" the market with it's holdings. The fire sale didn't depress the market, the market remained liquid. The issue here is the bank was overexposed to one assets class, government bonds. Their holdings likely went well beyond any regulatory requirement.
NoRegretsCoyote
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Indeed what are deemed "high-quality, liquid assets" are used by supervisors to calculate ratios of much banks have to hand if there are a lot of deposit outflows.
The problem is that something like a 5-year US bond is very safe (basically zero default risk) and very liquid (sellable round the clock) but is still worth about ten per cent less than it was a year ago as rates have risen a lot.
The markets very skittish since SVB last week, now Credit Suisse but for different reasons and troubles stretching back a while. The thing causing all bank shares to fall though is the fall in value of their government bond portfolios and the risk that everyone will look for their money back at once.
Now we see the real results of negative interest rates and too low interest rates for too long it is now affecting the balance sheets of all the banks.
Will the central banks now have to become buyer of those bonds at full value to backstop the banks if they need to sell?
Now we see the real results of negative interest rates and too low interest rates for too long it is now affecting the balance sheets of all the banks.
Will the central banks now have to become buyer of those bonds at full value to backstop the banks if they need to sell?
Brendan Burgess
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I was wondering where they will put it?
OK, so if I take my millions out of Silicon Valley Bank and put it into AIB. Now I am worried about AIB, but where do I go with it?
I can't take it out in dollar notes and keep it under the bed.
Brendan
Duke of Marmalade
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It's what happened in the UK with the LDI debacle.