SVB collapse: experts worry that 'fall-out risks spreading' as bank stocks plummet

There are concerns that the collapse of Silicon Valley Bank (SVB) may have a wider effect on financial markets. This follows news of sharp losses to regional US bank stocks, with big industry names also affected.

News that the US government had effectively taken over the SVB bank, with its UK arm sold to HSBC, has failed to reassure investors. This is despite President Joe Biden stating the system is "safe".

Western Alliance Bancorp plummeted by 81 per cent on Monday, with other regional banks massively affected. First Republic Bank dropped 72 per cent, with PacWest Bancorp falling 51 per cent.

Big US banks have also been affected. Wells Fargo and Bank of America fell by more than 7 per cent, before recovering slightly. Meanwhile, the FTSE 100 continued to fall, with standard Chartered and Barclays the biggest losers.

Commentators have said the actions of the US government have failed to stop the issue from spreading beyond the SVB collapse, as concerns grow over a possible full-scale bank run, presenting a significant threat in the market.

Daniel Elliot, a business consultant, analyst and regular contributor at International Business Times UK, wrote: "It is important to note that, for consumers, the money they currently have in the bank is most likely safe. However, the collapse of SVB is a significant event and a symptom of larger forces at play within the tech, finance, and economic sectors."

Susannah Streeter, head of money and markets at Hargreaves Lansdown, said, "Even though the collapse has centred on a small tech-focused corner of the financial system, the fall-out risks spreading."

Smaller lenders, like Western Alliance Bancorp, were affected the most. These banks have already been left vulnerable due to aggressive interest hikes by the US central bank.

"Investors have been shaken by the events of the past few days and are highly nervous about spilling over and creating pools of fresh problems," said the head of money and markets.

The failure of regulatory action to stop the problem is causing a loss of confidence, which is felt across the sector. Streeter further added, "The realisation that regulatory action isn't stopping the rot has led to sharp falls in some of Wall Street's biggest banking names."

Instead, people are looking elsewhere with their money. Gold Prices shot up, whilst government bond yields fell. This has been fuelled by President Biden's announcement that any bailout would not extend to investors.

In Europe, there are also fears that investors may pull their deposits and put them into other assets with a higher return, like short-term government bonds. Compared to the US, there is a far less generous deposit insurance scheme that leaves their money vulnerable.

Preparing for this eventuality means banks will need to hold on to customer deposits and not reinvest them. This in turn will negatively affect interest rates. Streeter said, "They will need to retain deposits and attract more capital in, and this is set to have an impact on their net interest margins at a time when confidence is already being sideswiped.''