There is only a small risk of fallout in Europe from the collapse of the US Silicon Valley Bank (SVB), but the problem should be monitored closely, said Stavros Zenios, a University of Cyprus finance professor.
He told CNA the contagion risks stem from the channel of venture capital and start-up firms which held their deposits with the failed bank.
“There is a sizeable economic activity, which faced financing pressures due to the rising interest rates.
“These pressures, combined with the SVB mistakes, created this crisis which exacerbates the pressure on this business sector.
“Therefore, there is grave concern over contagion in the US.
“It is hard to assess the problem in Europe as there are no details for economic activities and linkages (with SVB),” the UCY professor said.
In the UK, the Bank of England announced that Silicon Valley Bank UK is set to enter insolvency, following action taken by its parent company in the United States, stating that it will address any concern this raises for UK customers.
“The initial assessment is that the first wave of economic fallout is to other, mainly small banks which had operations with SVB and to the sector of venture capitals and start-ups,” Zenios said.
He also pointed out there’s anticipation over the response by the regulators, but the problem at SVB is manageable if the bank is given time to wind down its asset portfolio, as the bank has not engaged in risky investments but in long-term bonds of good quality which however posted losses due to the rise of interest rates.
Zenios explained that SVB’s problem was its mainly uninsured depositors, something which caused the crisis.
Analysts say 87% of SVB’s funding came from uninsured depositors, mainly venture capitalists.
“At the end of the day, this is something we should monitor, but I don’t see direct contagion risks for Europe”.
There is a big discussion about how the regulator was unaware that a huge share of SVB’s assets was in bonds held to maturity, while the bank had a small portion of secured depositors who do not panic easily.
“SVB was the Silicon Valley’s bank, and every start-up that obtained funding to cover its operating expenses held its deposits with the bank…these companies started pulling their money when they realised that the bank’s bonds were losing value.”
He also noted that in the last few days, a large inflow of deposits to larger banks was recorded, which is attributed to the perception of problems in smaller banks.
According to analysts, the losses in SVB’s bond portfolio created a capital gap for the bank.
“This a problem that slipped from the regulators’ attention”.