Written by 15:32 Financial Centre, International, Member

DVFA monthly question: SVB insolvency – Investment professionals see only low risk of contagion effects

In the current monthly question of the German Association for Financial Analysis and Asset Management (DVFA), members are asked about the expected effects of the recent bank insolvency.

Silicon Valley Bank (SVB), which specialises in financing start-ups, has been placed under government control in the USA. Its insolvency represents the biggest US banking collapse since the 2008 financial crisis. Since then, the shares of numerous banking institutions have been under pressure. The German Association for Financial Analysis and Asset Management (DVFA) asked its members in the current monthly question about the expected effects of the bank insolvency.

Peter Thilo Hasler, DVFA Board Member, summarises the results: “Our survey has shown that capital market professionals are still sceptical about the sustainability of banks’ business models 15 years after the financial market crisis. The voting results have shown that in the current interest rate environment, the vast majority of DVFA members even consider it possible that the matching maturities of financing – and thus one of the basic rules of the banking industry – could be violated.”

Investment professionals see only minor risks of contagion effects

The first question asked about possible contagion effects of the SVB insolvency. Almost three quarters (74%) of the survey participants see no contagion effects for other banks in the SVB insolvency in principle. Nevertheless, the vast majority of respondents (58%) advocate a more critical view of banking institutions, as other banks could also face problems due to a similar business strategy. Contagion effects due to the size of the SVB and its networking with other banks are considered possible by a quarter of respondents (26%).

Various consequences of the SVB insolvency

When asked what other consequences the SVB’s insolvency could have, multiple answers were possible. 63% of the respondents agreed with the answer that a worldwide increase in credit spreads could be expected, as the example of Credit Suisse had also shown. The opinion of the DVFA members was differentiated when it came to the profiteers of the SRP crisis: While 57% of the respondents assume that especially the large US banks would emerge as winners from the current banking crisis, 46% fear that there could be further insolvencies due to the confidence problem, especially in the USA. There was considerably less support for theories that the price of Bitcoins would continue to rise as a result of the SVB insolvency (12%) and that the USD/EUR exchange rate would weaken further (4%).

Duration mismatch also possible in Europe

The answer to the question of whether a duration mismatch is also considered possible in European banks is clear. 77% of the respondents consider this to be quite possible. This is by far the clearest statement in the entire survey. Although there are differences in the management and supervision of the institutions, banks in Europe could also have been surprised by the strong interest rate turnaround in their investment strategy. Only 10% assume that the influence of the European supervisory authorities prevents a duration mismatch, while 8% are of the opinion that the duration mismatch is an SRP-specific problem that does not occur at the more broadly diversified European banks.

Market calm expected

When asked about the possible impact of the SVB collapse on the equity market, 44% of respondents agree with the expectation that equity markets will calm down and then swing volatile sideways. However, a quarter of survey participants do not see the market as damaged across the board, but support the thesis that bank stocks will remain under pressure. A further 18% of survey participants see the SVB collapse as the entry into a downward trend, while 13% now expect an end to the strong interest rate turnaround and a new upward trend.

"There is a lot of uncertainty in the markets at the moment because many investors are struggling to answer the question of whether there is only a temporary or a structural problem in the financial world. The assessments of the professionals we interviewed support this thesis."

Source: DVFA e.V. as of 11 April 2023
Image: Unsplash

This is an automated translation of the German original.

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