The Silicon Valley Bank Failure’s Capital Markets Implications

The Silicon Valley Bank Failure’s Capital Markets Implications

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INSIGHTi

The Silicon Valley Bank Failure’s Capital
Markets Implications
April 7, 2023
The sudden failure of Silicon Valley Bank (SVB) and Signature Bank and troubles at several other banks
(e.g., First Republic Bank and Credit Suisse) triggered a selloff of bank shares in March 2023. Regional
bank shares (e.g., KBW Nasdaq regional bank index) were down nearly 20% year-to-date through March
17, 2023, while the general stock market performance (e.g., S&P 500 index) had a slight gain of 2% for
the same period. As of April 5, 2023, the overall stock market indexes went up higher, but regional bank
shares remained at depressed price levels (Figure 1). This Insight is part of a CRS product series
explaining the SVB event from multiple financial services perspectives. It focuses on the SVB failure’s
capital markets implications.
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Figure 1. Market Performance Before and After SVB Failure
(1/1/2023–4/5/2023)

Source: CRS using data from S&P Capital IQ.
Many factors may have contributed to SVB’s failure. Some of these factors are more unique to SVB’s
specific conditions (e.g., a heavy concentration of its depositor base and a high reliance on uninsured
deposits) or specific to banking industry risks (e.g., a bank-run event). Other factors have broader capital
markets implications. For example, SVB’s failure triggered broad capital markets reactions, including the
following:
 Flight to safety. Some uninsured deposits at the banking system reportedly moved from
banks to short-term Treasuries, money market mutual funds (MMF), and gold, in search
of safety. MMFs (largely MMFs backed by government securities) saw abnormal levels
of inflows following the SVB failure. Certain other less-safe alternatives, such as digital
assets (e.g., stablecoin Tether), also experienced inflows.
 Market volatility. The increased uncertainty fueled market volatility across many assets,
such as bank stocks and Treasury securities. Market volatility normally would not
warrant policy attention, unless it reveals perceived structural vulnerabilities. For
example, the GameStop event in 2021 has led to a number of legislative proposals and
SEC-proposed rules. One area during the March 2023 banking sector selloff that may
warrant a close watch is the liquidity conditions in the Treasury market that have showed
signs of vulnerability.
 Contagion effects. Some observers are concerned that the SVB failure may adversely
affect the technology startups’ funding and operations. SVB directly affected its
depositors, such as tech industry companies Roku, Roblox, and Rocket Lab USA, which
reportedly deposited $487 million, $150 million, and $38 million respectively at SVB.
Given the magnitude of the impact, some publicly traded companies filed an SEC Form
8-K to disclose their exposure or no exposure to SVB. The collapse also de-pegged
stablecoin USDC because of Circle’s deposits at SVB. The run fear generated tension at
similarly situated banks and across the banking system, leading to the pressure on
additional bank failures and banking sector stock price volatility. At a broader level, the
SVB failure, or similar events, could often erode market confidence that underpins the

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whole financial system’s liquidity and risk pricing. The related government actions to
address contagion effects appear to have backstopped a broader market selloff.
 Fear of a rising interest rate environment. For more than a decade (before the recent
rate hikes), the prolonged near-zero interest rates were thought to have driven up asset
valuations for stocks, bonds, and real estate, creating a perceived “everything bubble.”
The sudden increases in interest rates coming out of the “cheap money” environment
cause long-maturity assets with locked-in low yields to decrease in value. Such an asset-
liability mismatch is a type of market risk exposure that is broadly felt by different asset
holders, including other banks, and the amount of high-market-risk assets within the
financial system could be significant. In addition to issues at banks, corporate defaults are
also reportedly on the rise. One area that is particularly prone to rising rates is the zombie
companies, which face higher pressure from debt servicing costs (derived from higher
interest rates) that may push them over into default.
 Tightening of credit conditions. Following the SVB failure, the banking sector has
reportedly tightened lending standards for businesses and households, possibly leading to
less provision of funds to the real economy. As sources of financing that are an alternative
to bank lending, capital markets fundraising channels have also faced pressure from a
potential credit crunch, which reduces the general availability of credit from financial
institutions, including bank loans and non-bank financial intermediation. Certain business
segments, such as commercial real estate, have already felt the pressure. One concern is
that the reduced availability of financing has the possibility to adversely affect default
rates and the mortgage-backed securities market’s performance, leading to potential asset
fire sales and negative self-reinforcing cycles for asset pricing.
One common question is—does SVB represent a “canary in the coal mine”? In other words, instead of
being an isolated case, does the SVB failure reveal broader structural instability in capital markets? The
answer to this question rests on the interpretation of implications of recent changes in the costs of
fundraising, asset valuation, the size and composition of institutions’ assets, and the debt servicing costs
for institutions’ liabilities.
As of the time of this publication, the overall stock market performance, as measured by broad market
indices, has not been strongly affected, although events are still unfolding. Regarding how the events
would further unfold, some observers believe SVB’s failure could have ripple effects on smaller regional
banks, causing them to tighten lending standards and reduce lending, leading to another potential
deleveraging cycle that could affect the financial system and economy broadly. Others believe that at the
current stage of the debt cycle, when certain conditions are met, contractions are likely. Treasury
Secretary Janet Yellen has argued that the SVB failure is very different from the Great Recession and the
financial system is “significantly stronger than it was 15 years ago.” She reportedly affirms the possibility
of further intervention, if needed, to support smaller banks. Such promise of potential interventions could
help calm markets.

Author Information

Eva Su

Analyst in Financial Economics

Congressional Research Service
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Disclaimer
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