The Fallout from Silicon Valley Bank & The Insolvency Market

The fact that the Fed had to backstop all deposits over $250k is a worrying sign as to the fragility of the traditional banking sector.  It seems incredulous that the lessons of the 2008 crash have not been fully learned and instead of a rigged subprime mortgage resulting in catastrophic loss to the wider general public, we now have the next chapter in poor Governmental policy and monetary printing about to do untold harm not only to the burgeoning tech sector, but also the wider economy.

The decision by Rishi Sunak and the Treasury to facilitate the sale of SVB’s UK subsidiary to HSBC for £1 deserves credit, allowing customers once again to have immediate access to their money which in turn has protected the public purse since as it is not being called upon to bail out a failing bank.  However, the fact that the Fed had to step in and protect the 16th largest US bank raises big questions about how 2nd and 3rd-tier banks are regulated.  When the Fed started raising rates last year, the long-term T-bonds which SVB had invested in suddenly became unattractive, and the steady flow of deposits that the bank had relied on dried up, as investors sought more interesting returns.  But with such a large percentage of its holdings tied up in these instruments, it begs the question as to why SVB didn’t have a proper hedge to counter the possibility of rising interest rates, and where was the regulatory oversight? And Joes Biden’s response…..”the management of these banks will be fired”.  I am sure that’s a massive incentive to stop playing roulette with other people’s money.

Of course, a lot of the problem originates with the Fed pumping rates to correct the loose fiscal policy it had employed during COVID.  Endless money printing and currency debasement is not sustainable and the wider picture as to where all this takes us is still not fully understood.  Only a week ago the Fed Chairman, Jerome Powell, said rates would have to increase to tame inflation, now to counter further financial banking instability the opposite seems likely.  Given the interconnectedness of a global world, it feels like the financial markets are standing on an uncertain precipice, with the true damage of incompetent regulatory policy yet to be fully understood.  Although the fallout from SVB has been managed, the dust is far from settled and given the risk/return benefits of casino banking, it seems very likely that the insolvency & restructuring professionals will be unusually busy over the coming months ahead.