Why was trading halted in some banks and will SVB contagion spread? (2024)

Financial contagion fears triggered by the collapse of Silicon Valley Bank spread on Monday as shares across the sector plunged.

Such was the panic thattrading in at least 20 regional banks had to be temporarily halted as the value of their stock fell by up to 80 percent.

SVB's demise amid a run on the bank - which meant it couldn't cover customer withdrawals - raised fears other small and mid-sized institutions could be at risk. President Joe Biden and Treasury Secretary Janet Yellen were forced into the highly unusual step of issuing statements saying the banking industry is safe.

While analysts say the saga is unlikely to trigger a broader financial crisis on the scale seen in 2008, unrest could continue as the knock-on effects play out.

The collapse of SVB and fears for other banks are inextricably tied to the Federal Reserve's aggressive interest rate rises. Analysts also now believe plans to raise rates again this month could be paused to avoid further turmoil.

Why was trading halted in at least 20 other banks?

Stocks in more than a dozen regional banks tanked when the market opened on Monday.

The rapid fall in their prices caused trading of shares in those institutions to be halted. These 'circuit breaker trading halts' kick in when a price declines rapidly, with the intention of reining in panic selling and preventing an all out crash.

Investors rushed to sell shares in the banks over fears they were facing the same issues which caused SVB to collapse.

SVB failed because it didn't have enough cash to cover consumer withdrawals. This was partly because they'd used a large chunk of customer deposits to buy Treasury-issued bonds.

These bonds are usually considered safe, but the value of SVB's bonds suffered after the Fed increased interest rates to deal with rising inflation. SVB was forced to sell these bonds at a loss of nearly $2 billion to increase its liquidity.

Investors' concerns that a similar situation could be playing out at other banks were raised after the head of the Federal Deposit Insurance Corporation - which guarantees deposits at failed banks - said banks across America are sitting on $620 billion of 'unrealized losses'.

Will the contagion keep spreading?

Silicon Valley Bank mainly served startups in the tech sector. Analysts say that while this niche has made its collapse potentially fatal for new and growing tech firms who used the bank, it's softened the impacts for the wider banking sector.

Karen Petrou, managing partner of Federal Financial Analytics, told the Washington Post: 'It's extremely painful. It could have very adverse consequences: microeconomic harm, social welfare harm. People all of sudden could be up the creek. But that's not systemic. I don't think we're at risk of a crisis.'

But while SVB served a someone niche customer base, the issue it faced because of inflation and interest rate hikes exist across the banking sector - as highlighted by the warning of a $620 billion black hole.

That means it could take some time for trust in the industry to be restored.

It also remains to be seen whether the measures unveiled by regulators - including a $25 billion loan programfor other struggling banks - will ease fears.

Most analysts agree that America's largest banks, including JPMorgan Chase, Bank of American and Wells Fargo, are highly unlikely to face problems of the scale felt by SVB. While stocks in these institutions have also dipped, they hold cash reserves in the hundreds of billions of dollars that make a run on the banks extremely unlikely.

What about the Fed's plan for another rate hike?

While Silicon Valley Bank's failure can be partly blamed on bad management, the crisis is also linked to the Federal Reserve's aggressive interest rate hikes.

As a result, some industry experts say the Fed could pause plans to keep increasing rates because of what happened.

The Federal Reserve has hiked interest rates eight times over the past year to contain decades-high inflation.

This helped several lenders post healthy profits for 2022, but the higher rates have also lowered the value of bonds bought by banks when they had lower returns. SVB collapsed after it took a loss of $1.8 billion in the sale of $21 billion worth in securities.

Matthew Weller, head of research at Forex.com and City Index, said: 'In the wake of the implosion of SVB, traders are dialing down their expectations for Fed hawkishness next week.' In other words, investors think the Fed will ease off more hikes.

Eric Vanraes, Portfolio Manager of the Strategic Bond Opportunities Fund at Eric Sturdza Investments, said: 'For now, markets are not anticipating a Lehman Brothers style panic, and based on existing information, that is a reasonable response.

'If we were in a Lehman-style environment, the Fed would have already cut rates. Instead, the Fed knows that any further rate hike could trigger further bankruptcies in banks, hedge funds, pension funds, and the real estate market.'

What's the government doing to handle the crisis?

The Federal Reserve, the U.S. Treasury Department, and Federal Deposit Insurance Corporation decided to guarantee all deposits at Silicon Valley Bank, as well as at New York's Signature Bank, which was seized on Sunday.

Critically, they agreed to guarantee all deposits, above and beyond the limit on insured deposits of $250,000.

Many of Silicon Valley's startup tech customers and venture capitalists had far more than $250,000 at the bank. As a result, as much as 90% of Silicon Valley's deposits were uninsured.

Without the government's decision to backstop them all, many companies would have lost funds needed to meet payroll, pay bills, and keep the lights on.

The government has also unveiled aBank Term Funding Program backed by $25 billion in taxpayers' money to help other struggling banks cover withdrawals.

The goal of the expanded guarantees is to avert bank runs — where customers rush to remove their money — by establishing the Fed's commitment to protecting the deposits of businesses and individuals and calming nerves after a harrowing few days.

If all works as planned, the emergency lending program may not actually have to lend much money. Rather, it will reassure the public that the Fed will cover their deposits and that it is willing to lend big to do so. There is no cap on the amount that banks can borrow, other than their ability to provide collateral.

But critics say the measures amount to a bailout funded by the taxpayer.