SVB jitters spread to global markets

This is an audio transcript of the FT News Briefing podcast episode: ‘SVB jitters spread to global markets’

Sonja Hutson
Good morning from the Financial Times. Today is Tuesday, March 14th, and this is your FT News Briefing.

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The collapse of Silicon Valley Bank has prompted a flight to safety around the world. US bank stocks had another bad day. And venture capitalists are pointing fingers at each other for their role in the tech bank’s demise. We’ll talk to FT journalists in London, Wall Street and California about the latest developments. I’m Sonja Hutson, in for Marc Filippino, and here’s the news you need to start your day.

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The US government may have acted swiftly to take over Silicon Valley Bank and shore up confidence in the broader banking system. But the market jitters are continuing to spread. Here’s the FT’s markets editor, Katie Martin.

Katie Martin
It’s been really genuinely quite shocking the scale of the reaction in global markets. So you look at the government bond market, they have absolutely rocketed in price, yields have absolutely collapsed. At one point there was the biggest move on two year US government debt that we’ve seen since 1987, and that’s partly a flight to safety. You know, the bonds like that always do well when investors have got the heebie-jeebies about anything. But it’s also a massive bet that the US Federal Reserve simply won’t be able to keep raising rates as fast as it previously indicated. And some even think it might have to stop raising rates at all.

Sonja Hutson
So Katie, why is this happening? I mean, SVB was one bank in the US, it had its own unique problems and it’s still unclear whether other US banks have similar problems. Why would there be such a global impact?

Katie Martin
So when you see a move of that kind of magnitude in the US government bond market, it spreads everywhere. And so you’ve also seen some absolutely gigantic rallies in bond prices in the eurozone and in the UK. It’s really not often that you see a move like this. Now, does it make sense? Well, my crystal ball is on the blink, so I don’t have perfect view of what’s going to happen in the future. But it feels like a bit of a stretch to say that the Federal Reserve and other central banks will look at the next set of inflation numbers that come through and say, oh well, you know, nevermind, inflation is like several multiples of where it’s supposed to be, but we’re not going to do anything about it because of a small-ish Californian bank that has hit the skids and we’ve had to help out. So this is what we’re kind of trying to figure out in markets is, you know, is the scale of this move really, really justified by the news flow?

Sonja Hutson
That’s the FT’s markets editor, Katie Martin.

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US bank stocks were hit again yesterday. The damage was mostly on regional banks in the western US and their shares got crushed. One San Francisco bank called First Republic at one point yesterday saw its shares drop 75 per cent. Zions Bank, based in Utah, dropped close to 26 per cent. To find out more, I’m joined by the FT’s US banking editor, Josh Franklin. Hey, Josh.

Joshua Franklin
Hi there.

Sonja Hutson
Why did investors flee these banks in particular?

Joshua Franklin
I think you’re seeing a few different things happening. One is just the geographical focus, obviously, with what happened with Silicon Valley Bank, it really did focus investors’ attention around deposit outflows with customers who have a particular exposure to the tech industry. And then really, you’ve just seen it in any bank that’s seen a big increase in their deposits over the last few years. It’s reflective of big growth, but it also is a sign that maybe the deposits could be a little bit flighty, could be liable to be pulled. And then you also have any bank which has more longer-dated securities investments that they’ve made around, you know, longer-dated US treasuries and things like that. That’s also a sign of concern for some investors that in order to cover any deposit outflows, the risk that they might have to sell these securities at a loss is spooking investors.

Sonja Hutson
Have we actually seen any evidence that these fears are a reality, that there could maybe be a run on another bank?

Joshua Franklin
So anecdotally, there has been lots of signs of investors pulling money out of banks like First Republic. There were some pictures going around over the weekend of customers waiting in line outside their bank branches. So there definitely is that fear. The question is whether or not the profile of these banks look a lot like Silicon Valley Bank, which was a particular case in terms of the amount of deposits that they had invested in longer-dated treasuries, which spooked customers. And then also the amount of customers who were under the $250,000 insurance cap that the US government protects insurance. More than 90 per cent of Silicon Valley bank customers were, had deposits that weren’t insured by the US government. Even a bank like First Republic, lots of concerns around that at the moment. But only around two-thirds of their deposits are uninsured, which I should say is still pretty high as far as these things go, but much lower than Silicon Valley Bank.

Sonja Hutson
OK. The US government is trying to contain the situation. Over the weekend, it made it easier for banks to borrow funds from the Fed. And yesterday, we saw President Joe Biden come out and say this.

Joe Biden
Americans can have confidence that the banking system is safe. Your deposits will be there when you need them.

Sonja Hutson
Is this all enough to calm investors and depositors?

Joshua Franklin
That is the crucial question. I think, on Sunday, people thought that it might do enough, but I think there’s evidence to suggest that there are still a lot of fears around deposit holders pulling their money from a lot of banks. You see it in the share price reaction. So it certainly hasn’t calmed down all fears. And part of it is it’s not necessarily a logical kind of behaviour from people, especially if there is this kind of implicit guarantee of deposits. But I think there for a lot of people, they just look at it and think, I don’t even want any risk of my money being tied up, even for a few days in terms of I can’t access it. So I just want to pull my money out as soon as I can.

Sonja Hutson
Josh Franklin is the FT’s US banking editor. Thanks, Josh.

Joshua Franklin
Thanks very much.

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Sonja Hutson
Another player or group of players closely involved in SVB’s downfall are venture capitalists. Those are the people who fund start-ups. They’re huge players in Silicon Valley and they encouraged the companies they worked with to pull their money out of SVB.

George Hammond
There is this almighty postmortem going on as to who is at fault and how this happened.

Sonja Hutson
That’s the FT’s venture capital correspondent, George Hammond.

George Hammond
And venture capitalists are getting the blame for a lot of quarters for the collapse of the bank last week. The reason for that is that a few funds in the last few weeks, we’re going back at least a week, began to advise portfolio companies to potentially diversify or remove funds. And once that started, there was just this growing sense of, OK, well, if these people are worried about what’s happening in Silicon Valley Bank, and perhaps we should be, too. And that very quickly crystallised into a bank run in the tail-end of last week. And a lot of people think that those issues were surmountable. But the kind of rapid change in sentiment that came from venture capital funds advising their portfolio companies to make a move is really what did for this bank.

Sonja Hutson
So, George, I understand you’ve seen some of the emails that VCs sent last week suggesting that their clients take their money out of Silicon Valley Bank. Can you share some of them with us? Is there one that sticks out to you?

George Hammond
There were these emails flying around, venture capitalists sending emails to their portfolio companies saying stuff like, look, you know, not one to create panic, but it looks like there might be a run on the bank. So it kind of took on a life of its own very, very quickly. Someone that said this to me, and this was not their instruction in verbatim, but they, their philosophy on it was, look, if you’re gonna panic, panic first. And I think they sent a kind of coded version of that to their portfolio companies and, yeah, triggered a lot of them to go withdraw deposits immediately.

Sonja Hutson
Is it fair to say that venture capitalists are to blame for the Silicon Valley Bank collapse, or is there a case to be made, they were just protecting their clients?

George Hammond
I think the answer to that is that on an individual level, advising your portfolio companies to move money out of a bank, which doesn’t look quite as secure as you thought it did, is absolutely the right thing to do. It’s your fiduciary duty. It made sense for those individual funds, but when they did it en masse as a sector with a lot of influence here, it just totally toppled the bank.

Sonja Hutson
That’s the FT’s venture capital correspondent George Hammond.

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You can read more on all these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

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