The collapse of Silicon Valley Bank recently could only cause a sneeze in South Africa as emerging markets suffered less, losing only 1.5% compared to 10% of the equity value of developed economy banks. However, the collapse of Silicon Valley Bank is a major threat to the US financial system. US bank Silvergate Capital was liquidated two weeks ago and followed by the collapse of Silicon Valley Bank (SVB), raising questions about wider financial market contagion. But the economic research group, Oxford Economics Africa, said that the measures taken by the regulators, including the introduction of…
The collapse of Silicon Valley Bank recently could only cause a sneeze in South Africa as emerging markets suffered less, losing only 1.5% compared to 10% of the equity value of developed economy banks.
However, the collapse of Silicon Valley Bank is a major threat to the US financial system.
US bank Silvergate Capital was liquidated two weeks ago and followed by the collapse of Silicon Valley Bank (SVB), raising questions about wider financial market contagion.
But the economic research group, Oxford Economics Africa, said measures taken by regulators, including the introduction of a new Term Bank Funding Program, should be enough to calm investor nerves and help prevent last week’s flight-to-safety.
However, the group warned that African capital markets remain vulnerable to fluctuations in advanced market sentiment and risks are currently high.
The group said SVB’s collapse was a major threat to the country’s financial system as markets saw it as a symptom of similar problems at other banks around the world, even though SVB was only the 16th largest US bank.
It is one of the many banks holding a large portfolio of long-term securities, which can experience heavy losses if sold before maturity.
Oxford Economics Africa said it could not rule out the possibility that other companies would find themselves in a less favorable position with the Fed amid its most aggressive rate hike in 40 years.
Also read: Collapse of Silicon Valley Bank is no surprise
Where Africa can be affected
“What is happening in the US informs global risk sentiment and this is the main channel through which Africa will be affected. It is an indication that there is a risk of contagion and that there is a wider impact, if the baseline remains limited.
The group expects that the US economy will experience a mild recession during the second half of this year mainly because the Federal Reserve will continue to tighten “until they destroy things”.
The collapse of SVB is the main sign that this is happening and as it continues to increase rates, there are other signs.
The Bureau of Economic Research at the University of Stellenbosch said the collapse of SVB and the subsequent failure of other banks with the third entering liquidation, reverberated through the global financial market.
Stock and bond markets continued to experience wild swings after Switzerland’s second-largest bank, Credit Suisse, which has been rocked by several scandals in recent years and had been under pressure before the collapse of SVB, suffered further losses amid the contagion of US banking problems. and adverse auditor’s report.
This further shook the market, especially after Credit Suisse was sold to Swiss Bank. BER said the need to support financial stability has led US authorities, including the central bank, to take steps to secure deposits from SVB clients.
Financial institutions can ‘involuntarily’ tighten credit standards when the SVB collapses, which means the central bank will have to do less for inflation and risk overtightening if it continues on the trajectory mentioned earlier.
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When a small bank grows very fast
Andre Reichel, a specialist in the global financial sector at Schroders, said three years ago, SVB was a relatively small bank, but its balance sheet tripled rapidly due to money flowing into the technology sector and venture capital during the pandemic. management mindset does not keep up with the fact that the bank has become a very different, bigger, business in a short time.
“It is too early to say that the crisis is over. Some banks may still be vulnerable but, importantly, the backstop is now in place. Even if other small banks fail, the wider system is protected. What we will see is that some of these small banks will manage review the business model to reduce the risk of similar situations.
The collapse of the SVB demonstrates the extent to which rising interest rates have exposed weaknesses previously hidden by the low-rate environment.
The Fed will set new rates in the next day or two and while a 50 basis point hike is already on the cards amid still high inflation, SVB’s failure could change that.
Keith Wade, chief economist and strategist at Schroders, said that the Fed will want to not make the current situation worse and therefore can withdraw from significant tightening, but the difference between now and the Global Financial Crisis in 2009 is that inflation is a problem now.
“That limits what the Fed can do, because bringing inflation back to target should be the main focus.”