SVB collapse: risk of contagion to Cypriot economy is limited

The collapse of Silicon Valley Bank has reverberated around the world, sending shockwaves through the global economy, with numerous companies in the US, Europe and the Asia-Pacific region being directly affected.

Cypriot economists, however, have explained that the risk of contagion to the local economy is limited, noting that the unfolding crisis is not a direct reflection of the devastating financial collapse of 2008, whose catastrophic effects were felt throughout the previous decade.

Professor of finance and management science at the University of Cyprus Stavros Zenios said that the risk of the problem spreading to Europe is minimal, although it should be closely monitored.

It should be noted that as of this moment, approximately 16 technology and life sciences companies in Europe have disclosed about $190 million in exposure to SVB in the UK and the United States. While obviously negative for the companies involved, as well as their staff, partners and customers, it is not a system-wide problem.

Zenios said that any risk of contagion exists through venture capital firms and startup companies, which SVB primarily catered to.

“In the US there is a lot of concern about contagion. In Europe, it is difficult to assess this at the moment because there are no details of the bank’s financial activities and connections,” Zenios said.

Notably, the UK Treasury has already announced that HSBC has acquired Silicon Valley Bank UK Limited, the bank’s subsidiary.

“The first assessment is that the first wave of financial contagion is primarily to other small banks that had business with SVB and the venture capital and startup business sector,” Zenios explained.

Moreover, Zenios said that he deems that the issue with SVB is manageable if the bank is given time to recover its portfolio because, as he said, the bank did not have risky investments, but long-term bonds of good quality, with their value dropping due to the increase of interest rates.

According to reports, 87 per cent of the bank’s deposit base, which amounted to approximately $172 billion, came from non-guaranteed deposits, including business deposits from venture capital.

“At the end of the day it’s something we have to monitor and I don’t see any immediate risks of contagion in Europe,” Zenios said.

When asked how SVB’s practices were not the subject of stricter supervision, Zenios noted that there is a great deal of debate about how “a huge part of the bank’s portfolio, which was in investments in held-to-maturity bonds, escaped supervisory control”.

“This bank serviced Silicon Valley, where every startup that secured financing to cover its operating expenses deposited its funds”, he added.

However, when the bank’s assets declined in value, depositors panicked and withdrew their money.

This was reflected in large inflows of money into large banks, something which has been attributed to people’s increasing distrust of smaller banks.

As a result of the aforementioned withdrawals, the decline in the value of SVB’s bond portfolio created a capital vacuum in the bank.

“It’s a problem that this appears to have escaped regulatory oversight,” Zenios stated.

Meanwhile, Sofronis Clerides, professor of economics at the University of Cyprus, said that the collapse of SVB, as well as the resulting fall of Signature Bank, should compel central banks to rethink their policy of increasing interest rates as a measure to deal with inflation.

Clerides told the Cyprus News Agency (CNA) that SVB is the first major victim of the rise in interest rates.

He added that there was always the concern that this increase in interest rates as a result of inflation would create risks for the financial system, explaining that the SVB case may also have implications on how central banks will act from now on.

Furthermore, he noted that US authorities have designated both SVB and Signature Bank as systemic banks, which gives them the right to protect all deposits, in an effort to reassure investors and prevent other bank failures.

As far as monetary policy is concerned, Clerides said that a review of the data after the latest developments is certainly on the agenda.

In addition, he said that it is very likely that the interest rate hikes anticipated in the coming months will either not occur at all or will be smaller than originally expected.

In terms of the two banks’ demise having an effect on Europe, the Cypriot economist said that so far there is no danger of contagion, adding that if US authorities’ interventions succeed and the markets are reassured, this situation may be put to rest sooner than expected.

However, he did not completely exclude the possibility that some European banks may have behaved in similar ways to SVB and are thus also at risk.

At the same time, Cypriot economist Andreas Iosif said that SVB’s collapse and the resulting predicament does not constitute an identical situation as the 2008 financial crisis, itself precipitated and accelerated by the collapse of Lehman Brothers.

“Many financial analysts do not expect this bankruptcy to greatly affect the broader banking sector. Silicon Valley was big, but with a special characteristic, since it mostly served the technology sector and was concentrated in such companies. The tech industry suffered losses last year, as reflected in the stock value of the biggest tech giants as well as their financial results,” Iosif said.

“The concept of diversification, one of the fundamental principles of risk management, therefore, becomes once again more relevant than ever. Other large banks successfully implement diversification policies using various industries, thus reducing the probability of bankruptcy in case of adverse scenarios in a certain industry,” he added.

Finally, Iosif explained that the latest round of stress tests by the US Federal Reserve at the country’s largest banks showed that in a deep recession, banks have the necessary tools to cope.