On Friday, the U.S. federal government stepped in to take over Silicon Valley Bank SIVB in an effort to ensure depositors don't lose trust in the banking system.
The Federal Reserve and other agencies feared that the second-largest private bank collapse in U.S. history could have propelled a generalized run across the sector referred to as "contagion."
Experts at the Goldman Sachs investment strategy group described measures taken by the Fed as "significant" and "directly aimed at preventing contagion."
These measures include ensuring that by Monday, insured customers of SVB with accounts of up to $250,000 would be able to have full access to their funds. For uninsured customers — representing around 90% of the bank's clientele — the Federal Reserve and the FDIC announced a set of measures on Sunday that allowed them to backstop uninsured deposits.
The Fed also introduced a program that offers new sources of liquidity to banks, to prevent the need for these institutions to sell high-quality assets at a loss in order to meet withdrawal shortfalls, which is in part what triggered the SVB crisis.
See Also: Why Silicon Valley Bank Collapsed: A Simple Explainer
Most Banks Don't Share SVB's Vulnerabilities
Aside from these measures, Goldman Sachs analysts said that the risk of contagion into the banking sector is mitigated by the fact that large banks in the U.S. — such as JP Morgan Chase & Co JPM, Wells Fargo & Co. WFC and Bank of America Corp BAC — don't share the same vulnerabilities that pushed SVB to collapse.
Catering mostly to the U.S. tech startup sector, SVB's financials became tied to the tides of the venture tech space. This sector boomed after the outbreak of the COVID-19 pandemic, leading to increased deposits by tech startups.
SVB's deposits almost tripled between late 2019 and early 2021, against a mere 34% average raise across the banking sector.
Since the bank was not able to turn these deposits into loans quickly, it invested its excess liquidity into securities, leaving the bank more vulnerable than its competitors to losses when interest rates began rising in 2022.
As the crisis loomed, in order to absorb losses and improve its liquidity, SBV tried to issue more equity, but since at the time of the collapse the bank was trading below its value, issuing equity would have resulted in dilution for its shareholders, which in turn led them to further dump the stock.
Goldman Sachs said only 3% of regional banks are trading below their value these days, leaving most banks far from falling into this downward spiral loop.
Tier 1 U.S. banks today are also in much better conditions than SVB, says Goldman Sachs, boasting a multi-decade high in their ability to absorb losses.
"Banks today hold more cash, fewer risky real estate loans and have a much lower loan-to-deposit ratio," wrote Goldman Sachs analysts.
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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