TD Cowen: SVB’s fall does not threaten the stability of the banking system

The stunning collapse of Silicon Valley Bank (SVB) became the news of the day in the world of finance. Analysts from various firms are debating the consequences of this collapse in all areas of the industry. There is still no consensus on the real depth of this new episode that adds more drama to the current financial context.

It is important to note that not everything revolves around the possible cataclysms that will follow this recent event. Among the optimistic voices is Jaret Seiberg, who is an analyst at TD Cowen. In a letter to his clients, quoted by specialized media, he called for calm and said that the U.S. banking system is robust and will surely withstand the shock.

In this sense, the expert believes that this episode will not affect the sector and adds that the bank’s collapse was internally motivated. By this he means that the lender’s failure had nothing to do with the conditions surrounding the sector, but with its own business model.

In a similar tone, the US Treasury Secretary, Janet Yellen, recently expressed herself. She pointed out that regulators have “effective tools” to avoid greater evils.

SVB’s fall is not a problem for the banking sector?

From the moment the problems with SVB began, analysts stressed that the fall would be accompanied by other banks. Portals such as MarketWatch warned that at least a dozen lenders would suffer the same fate as Silicon Valley Bank. In a recent article, they highlighted the fact that many of these banks were in a more desperate situation than the protagonist of the disaster itself.

The fact that a dozen banks could fail as a result is synonymous with very serious problems in the entire sector. However, this is not the case, at least that is what the aforementioned TD Cowen expert thinks. “We do not believe this is the start of a broader threat to the safety and soundness of the banking system,” he wrote on Friday just hours after the financial services firm’s collapse.

Seiberg stresses that the bank’s business model was the main cause of its destruction rather than problems in the broader sector. He adds that the problems stemmed from the fact that the way it operated did not rely on retail deposits. Thus, unlike traditional banks, SVB’s main driver was the technology companies and not the retail or other sectors that represent solidity and security. With the problems in the area and without the support of retailers, the model was already fractured.

The expert adds:

“Like Silvergate, Silicon Valley had a unique business model that was less dependent on retail deposits than a traditional bank. This made the bank more exposed to interest rate risk, as its funding became more expensive, but its assets did not appreciate further.”

Under such a scenario, the analyst insinuates that SVB’s fall was more than foretold and the board’s mid-week moves were ”courtesy”.

A repeat of the 1980 banking failure

Rather than a problem related to weaknesses in the current banking sector, Seiberg stresses that there is another backdrop. Accordingly, he argues that this lender’s meltdown is a repeat on a scale of the banking failures of the 1980s. By that he means the episode of the savings and loan crises of that time.

To illustrate the analyst’s words, they underline that the bank had three possibilities of support in order not to slip and bet on the most insecure one. These possible supports are the aforementioned retail sector, the real estate sector and the technology sector. He expresses that this bankruptcy can serve as an experience for regulators when creating a reform of liquidity rules.

It should not be lost sight of the fact that most banks enjoy good returns in the current context. This is due to high interest rates, which allow spreads to widen between what they earn on loans and investments and what they pay for funding. This basic fact gives validity to the analyst’s words that the sector is in an enviable moment to predict a negative chain reaction.

In any case, the fall of SVB is a delicate matter for a significant number of banks that were linked to it. However, the system as a whole is not swimming in the same waters. Despite this, nervousness seems to be spreading among investors and customers of many credit institutions. Some government officials are quick to call for calm in the face of the possibility of a bloodletting of considerable dimensions.

Janet Yellen rules out a major problem with SVB’s collapse

Among the government representatives who came out to call for calm is the Secretary of the Treasury, Janet Yellen. After the bank’s collapse was confirmed, the official assured on Friday that the United States “remains resilient”. She added that regulators have the necessary tools to deal with the lender’s collapse.

As reported by Bloomberg, Yellen convened an emergency meeting with officials from various agencies. Prominent among them are the Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency. Officials from these agencies met on an emergency basis to discuss the SVB case and what it could mean for the entire U.S. financial sector.

Yellen’s concern would be centered on the fact that days ago the firm Silvergate also went bankrupt. The result of that environment is that it caused the sale of thousands of shares across the sector in a wave of panic and distrust towards banks. As a result, the Treasury was forced to make a pronouncement to avoid a major panic among investors, which could be absolutely harmful.

Hours before SVB’s fall, the banking index suffered one of the worst punishments due to investor nervousness. Members of that benchmark lost some $90 billion in value that day. Also on Friday (March 10), Europe’s largest banks lost an estimated $40 billion in market capitalization.

The whole scenario creates the danger that, if the situation is not handled properly, a major meltdown could hit the entire financial universe. Some banks such as First Republic and Signature Bank announced the halt of operations in the stock market momentarily on Friday, according to CNN.

The other side of the forecasts

Simultaneous to the TD Cowen analyst’s attempts to calm the waters, there are also the pessimistic predictions. The fact that the collapse of Silicon Valley Bank is having knock-on effects on other banks and even among some crypto companies is striking. It is an announcement that there will be bigger problems ahead, some analysts believe.

Dennis Kelleher, who is a managing director at Better Markets, is in that line of thinking. When asked by Bloomberg, he takes it for granted that there will be a contagion crisis that will lead to numerous bank failures. In his opinion, an abrupt financial reform is required to prevent this type of scenario from becoming an everyday occurrence in the credit area.