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" Should investors fear the aftermath of the collapse of the Silicon Valley Bank ? "
SVB specialises in lending to start-ups and young tech companies
This high-risk business suffered since rates started to rise a year ago
Its business model is causing a continual fall in cash as the companies it partners with are using their funds
In order to face cash withdrawals , SVB recently disposed of part of its fixed income investments , at a loss, thus putting strain on its capital
In a bid to shore up its finances and guarantee long-term solvency , SVB decide to increase its capital by US$ 2,25 bio by issuing new shares
On this news the stock plummeted 60% and the entire US banking system was shaken in the markets fearing potential contagion risks
The US regulator decided to take control of SVB by guaranteeing customer deposits and allowing cash withdrawals
the share has been suspended on the stock market
Should investors fear contagion to US Banking system ?
Not really . There should be no big surprises in terms of unrealized losses on the bond portfolio of major US Banks as they must use ' mark to market accounting and they must re-evaluate their bond portfolio at market value when they publish quarterly results
generally speaking Banks have very healthy liquidity positions and therefore do not need to sell bonds to guarantee their liquidity
SVB is a singular case and its woes are due to its particularly poor cash and balance sheet management
overall , credit default swaps (CDS) of American Banks have widened very little , by just a few basis points
In addition we are still long way off the peaks reached in October during the crisis surrounding the restructuring of Credit Suisse
Fear to European banking system ?
this scenario is even less likely
few European Banks specialize in niches like SVB
European Banks are usually more diversified and well regulated
Other consequences
Paradoxically , this crisis might even prove positive for equity markets , IF the American Federal Reserve were to temper its monetary tightening policy to boost liquidity and market confidence
we believe Investor appetite will focus to quality companies with solid balance sheets and generating sufficient cash to distribute among their shareholders