Problems at California-based lender Silicon Valley Bank (SVB) have refocussed attention on financial sector risks. In light of this, we are resending a report from last October that provides a framework for clients to think through these risks. The concerns about SVB stem from a sharp fall in the value of its assets, caused by rising bond yields (and thus falling bond prices). But as the report notes, banks in general are better capitalised than in the past, meaning they are better able to withstand asset write-downs. A combination of lower asset prices and weaker economies are likely to cause further problems at individual institutions (such as those at SVB) but we don’t expect these to morph into a broader solvency crisis across the system. The bigger risk is that concerns about the health of individual institutions cause a wider collapse in counter-party confidence that causes liquidity problems across the system. But the report also explains how central banks have tools to deal with liquidity problems should they emerge.
We will digest the market fallout of the SVB crisis in today’s Capital Daily. In addition clients might wish to read this piece assessing risks in the shadow banking sector, and this piece revisiting the case for US bank equity outperformance.
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