Silicon Valley Bank collapse

Silicon Valley Bank collapse: How it affects Forex Trading?

The world’s economy was shaken by the news of (SVB) the Silicon Valley Bank collapse, one of the largest banks in the US. The impact was seen globally, triggering substantial drops in American market indices, notably the Nasdaq, and sparking a global sell-off. While a 2% drop in the stock market is not unusual, it was linked this time to the big banking sector’s decline. Forex traders should be aware of banking instability because banks are in charge of managing financial transactions.

What is Silicon Valley Bank (SVB)? 

Silicon Valley Bank, also known as SVB, ranks 16th among the largest banks in the United States, holding assets worth more than $200 billion and client funds totaling $340 billion by the end of 2022. The bank was established with the objective of fulfilling the financial needs of rapidly expanding startups, primarily in the tech and healthcare industries. SVB was actually the first-choice banking partner for almost 50% of all venture-backed startups in the United States. 

Silicon Valley Bank Collapse: What Happened? 

Things started to go wrong in 2022 as the tech industry underwent a paradigm shift. While the preceding years had been prosperous due to increased reliance on online companies during Covid-19 lockdowns, businesses that had deposited their funds with SVB faced a setback. This was because their deposits had been invested in bonds, which were normally considered a secure investment. However, interest rates rose in response to the global cost of living crisis, causing the value of the bonds to decrease.  

Consequently, some companies grew concerned about the safety of their deposits and withdrew their funds. In an attempt to satisfy the needs of its investors, SVB had to sell its bonds, which were announced on March 8th, 2022. As a result of the announcement, more organizations withdrew their funds, resulting in the collapse of SVB two days after its announcement, despite its $200 billion valuation. 

Silicon Valley Bank collapse

The Federal Deposit Insurance Corporation (FDIC) was appointed to take over the bank by California banking regulators. According to a statement from the FDIC:  

“All insured depositors will have full access to their insured deposits no later than Monday morning, March 13, 2023. The FDIC will pay uninsured depositors an advance dividend within the next week. Uninsured depositors will receive a receivership certificate for the remaining amount of their uninsured funds. As the FDIC sells the assets of Silicon Valley Bank, future dividend payments may be made to uninsured depositors.” 

After hearing the news, SVBI’s share price plunged by 60.41 percent on 10 March, causing the NASDAQ stock exchange to halt trading as investors await further developments. 

Stocks of US banks drop $52 billion after SVB troubles. 

Last Thursday, the financial sector was affected by news of reported trouble at SVB Financial, a major lender with a focus on Silicon Valley. 

This resulted in a cumulative loss of $52 billion in stock prices for the four largest US banks. Specifically, SVB Financial’s shares plummeted by 60 percent on Thursday and continued to decline in after-hours trading. This was due to an announcement made the previous evening that the company had incurred a loss of $1.8 billion from sales of securities to raise funds.  

The significant drop in SVB Financial’s stock price had a ripple effect on the financial sector, causing JPMorgan Chase, the largest US bank, to end the day down 5.4 percent. Additionally, Bank of America and Wells Fargo both fell 6.2 percent, while Citigroup was down 4.1 percent. 

New economic concerns arose from SVB’s Collapse 

The collapse of SVB has understandably caused concerns about the overall health of the financial system, with worries that other banks could suffer the same fate. Adding to the unease was the sudden closure of Signature Bank on Sunday after it faced a wave of withdrawals on Friday following the collapse of SVB. Additionally, Silvergate Capital’s announcement that it was entering voluntary liquidation heightened fears about the stability of the banking industry. 

While banks are generally in a better position than during the last financial crisis and are not as exposed as SVB, there is still a risk of a self-fulfilling prophecy if a widespread bank run occurs. Central banks and regulators have acted quickly to calm nerves, but smaller regional banks remain at risk if consumers and businesses shift their money to larger, more stable banks. The decline of First Republic and Western Alliance by 60% to 70% highlights the impact of these concerns on the market. 

The collapse of SVB also raises concerns about the future of finance for important industries such as healthcare, life sciences, and technology. While fears of businesses being unable to pay wages and bills this week have been avoided, the funding prospects for high-risk, high-reward startups may be affected. 

How will SVB’s collapse affect Interest Rates? 

The attention has been drawn to the effect of the Federal Reserve’s forceful interest rate increases and the pressure it is placing on certain sectors of the economy due to the collapse of SVB. The market had predicted a 50-basis points rate hike during the Fed’s March meeting, but after the SVB collapse on Friday, the probability has rapidly shifted towards a 25 basis points increase.  

There is a belief in the market that the Fed may choose a smaller rate hike or even maintain the current rate until May to prevent other areas of the financial system from suffering a similar fate as SVB. 

Should forex traders be concerned about the SVB crisis? 

It is crucial for forex traders to pay more attention to the collapse of SVB in order to make informed trading decisions. Here’s why! 

USD Subdued ahead of Powell's Testimony, Aussie Down on Less Hawkish RBA 

US Dollar slips after SVB’s collapse 

On Monday, the U.S. dollar experienced a sharp decline because the market believes that the Federal Reserve will either slow down or completely halt its plan to increase interest rates in order to control inflation.  

This is in response to the sudden collapse of Silicon Valley Bank and the measures announced by the U.S. government to limit the impact. The government has also ensured that customers of New York’s Signature Bank will not suffer losses. In addition, the Fed has introduced a new Bank Term Funding Program that will provide loans for up to one year to depository institutions, which will be supported by Treasuries and other assets.  

The dollar index, which compares the U.S. currency against six other currencies, dropped to 103.69, its lowest point in a month after Goldman Sachs announced that it no longer expects a rate hike at the upcoming Fed meeting.  

This sudden collapse of SVB has led investors to believe that the Fed will be cautious in its decision to raise interest rates by 50 basis points this month. Investors are now focused on the inflation data to be released on Tuesday to assess the likelihood of the Fed’s hawkish stance. 

Asian currencies gain against USD after the SVB collapse. 

In the wake of Silicon Valley Bank’s collapse and hopes that the US Federal Reserve will hike interest rates less aggressively in the future, the Thai baht led Asian emerging currencies higher on Monday.  

A strong gain of 1.6% boosted the Thai baht THB=TH to 34.43 per dollar, its highest level since March 1, while the Philippine peso PHP= and Singapore dollar SGD= gained 0.6% and 0.3%, respectively. 

In addition, the United States is scheduled to release its inflation figures on Tuesday, which will provide additional insights into the Federal Reserve’s potential stance on increasing interest rates, resulting in continued high volatility among Asian currencies. 

In other parts of Southeast Asia, the Indonesian rupiah (IDR=) gained 0.6%. It is anticipated that the central bank of Indonesia will maintain its policy rate at its forthcoming monetary policy gathering. The Malaysian ringgit (MYR=) rose by 0.9%, which is its most significant gain since mid-December.  

In regards to stocks, the concern is that if the U.S. stock market experiences a downturn in the upcoming months due to a weakening economy or recession, this could have a ripple effect on Asian stocks as well. 

EUR/USD rises for a third day after SVB collapse. 

The EUR/USD has increased for three consecutive days while the US dollar has declined, as investors consider the possibility of additional systemic risk after the collapse of Silicon Valley Bank (SVB) last week. Despite efforts by US regulators to reassure the financial markets by providing a new lending program for institutional investors and deposit protection of $250,000 for depositors, share and bondholders will still face losses.  

The EUR/USD is now at a one-month high after breaking through the downtrend line from February to March at $1.0638 and surpassing the last reaction high at $1.0694, indicating a potential bottoming formation. The market is now focusing on the December peak at $1.0736 and the mid-January low at $1.0766, with a rise above these levels targeting the mid-February high at $1.0804. Any drops in the EUR/USD should find support between Monday’s intraday low at $1.0664 and the previously breached one-month downtrend line, which is now acting as a support line at $1.0638 due to inverse polarity. 

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Silicon Valley Bank collapse: FAQ 

What is SVB crisis? 

Following the 2008 financial crisis, the Silicon Valley Bank, headquartered in California, suffered one of the largest banking failures. Within just two days of the announcement, the bank witnessed a significant decrease in deposits, prompting the initiation of share sales. This caused both customers and investors to abandon the failing institution upon hearing about its collapse. 

What went wrong with SVB? 

SVB had made a massive unmitigated gamble on interest rates remaining low by investing heavily in long-term bonds. However, this wager backfired, resulting in the bank becoming insolvent or close to it. Despite the shareholders being wiped out and bondholders facing significant losses, the financial system is not at fault. 

Why did Silicon Valley Bank collapse? 

Silicon Valley Bank failed due to a run on the bank, despite not being insolvent beforehand. Banking relies on both cash and confidence, and once confidence is lost, the game is over. The bank sold $21 billion of bonds at a $1.8 billion loss, seemingly because they were underperforming relative to their peers and the bonds were yielding only 1.79% at a time of rising interest rates. 

What triggered SVB collapse? 

The Bank’s announcement of selling securities at a loss and issuing $2.25 billion in new shares to recover its finances triggered a run on the bank, causing customers to withdraw their money in large numbers and leading to a 60% stock plummet on Thursday. This also sparked fears among investors of a potential repeat of the global financial crisis. 

What does the SVB collapse mean for the economy? 

Major banks, particularly those that are systemically important, meaning they hold a critical position in the financial system, could have substantial economic consequences if they collapse. In the event of a bank failure, the public may lose trust in the banking system, resulting in a rush to withdraw funds from other banks. 

What banks are affected by SVB collapse? 

$52 billion lost in US banks’ stock prices due to SVB Financial’s $1.8 billion loss from securities sales, causing a 60% drop in SVB Financial’s shares and a ripple effect on other banks’ stocks, with JPMorgan Chase down 5.4%, Bank of America and Wells Fargo down 6.2%, and Citigroup down 4.1%. 

What happens if banks collapse? 

Bank collapse can trigger a banking system confidence loss, causing a run-on of other banks, and leading to a financial crisis. It can also result in creditor and investor losses, causing economic ripple effects such as credit contraction, reduced economic activity, and increased unemployment. 

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