UCY Professor sees little risk of financial fallout in Europe from SVB’s collapse

Stavros Zenios professor of Finance at the University of Cyprus said he sees a small risk for a fallout to Europe from the collapse of US Silicon Valley Bank (SVB), noting however that the problem should be monitored closely.

Speaking to CNA, Zenios said the contagion risks stem from the channel of venture capital and start-up firms which held their deposits with the failed bank.

This is a sizeable economic activity, which faced financing pressures due to the rising interest rates. These pressures, combined with the SVB mistakes created this crisis which exacerbates pressure on this business sector.

“Therefore, there is grave concern over a contagion in the US. It is hard to assess the problem in Europe as there are no details for economic activities and linkages (with SVB),” the UCY professor added.

In the UK the Bank of England announced on Friday that Silicon Valley Bank UK is set to enter insolvency, following action taken by its parent company in the United States, stating that it will address any concern that this raises for customers of Silicon Valley Bank UK as a matter of priority.

“The initial assessment is that the first wave of economic fallout is to other, mainly small banks which had operations with SVB and to the sector of venture capitals and start-ups,” Zenios said, adding we must monitor the issue closely.

He also pointed out that there’s anticipation over the response by the regulators and the FDIC but he pointed out that the problem at SVB is manageable if the bank is given time to wind down its asset portfolio, as the bank has not engaged in risky investments but to long-term bonds of good quality which however posted losses due to the rise of interest rates.

Zenios explained that SVB’s problem was its depositors which were mainly uninsured something which caused the crisis.

According to analysts, 87% of SVB’s funding came from uninsured depositors, mainly venture capitals.

“At the end of the day this is something we should monitor but I don’t’ see direct contagion risks for Europe,” he went on to say.

There is a big discussion as to how the regulator was not aware of the fact that a huge share of SVB’s assets were in bonds held to maturity, while the bank had a small portion of secured depositors which do not panic easily.

“SVB was the Silicon Valley’s bank and every start-up that obtained funding to cover its operating expenses held its deposits with the bank,” he said invited comment on that, adding that the problem emerged when these companies started pulling their money when they realised that the bank’s bonds were losing value.

He also noted that in the last days a large inflow of deposits to larger banks was recorded which is attributed to the perception over problems in smaller banks.

According to analysts, the losses in SVB’s bond portfolio created a capital gap to the bank.

“This a problem that slipped from the regulators’ attention,” Zenios concluded.

(Source: CNA)