No risk to big banks from collapse of Silicon Valley Bank

Michael Blümke, Senior Portfolio Manager at ETHENEA Independent Investors S.A. analyses the consequences of the collapse of the American Silicon Valley Bank (SVB).

Against the backdrop of SVB's internal risk management (no duration hedging at all for a book with a huge duration mismatch), its unprecedented growth story and its very focused customer base, it very much points in the direction of an idiosyncratic event. Of course, there was a risk that some other regional banks could face a similar risk, just because you can't rule out bank runs. This was never a risk for larger banks with more supervision and better capital ratios. However, the fact that the FDIC (Federal Deposit Insurance Corporation) took over SVB and made all deposits whole (although only amounts up to USD 250,000 are insured) is a strong sign from the government to build confidence and stop the process of uncertainty in the beginning. Please keep in mind that the whole thing only becomes a problem if there is not enough confidence in the system. Nevertheless, in addition to the huge moves in bank stocks and the equity market as a whole, the most notable development has been the flight to safety in the fixed income space. Demand for safe government bonds caused short-term interest rates to fall sharply on Friday and Monday. Expectations for further rate hikes were completely repriced in just four days. We at ETHENEA, on the other hand, have only slightly adjusted our expectations and continue to assume that the Fed will stick to its original plans for interest rate hikes. This implies an expected target rate of 4.25% for Europe and 5.5% for America.

Having ruled out any contagion, we took the opportunity to even increase the equity weighting in the Ethna-AKTIV as we approached the lower level of the expected trading range. In terms of duration management, we have maintained our zero duration position as we believe that the situation will very soon shift back to the inflation narrative. Again, in the past the Fed kept hiking until something broke. Whether this event counts as a break is open to debate. We don't think so.

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