Climbing interest rates have choked off access to cheap finance needed for expansion and growth across many industries, including the technology sector. After a massive outflow of clients and losses on long-term bonds, California financial regulators closed down the tech lender Silicon Valley Bank (SVB), which ranked as the 16th-largest US bank by total assets, citing inadequate liquidity and insolvency. SVB’s closure was followed by that of its competitor, Signature Bank. The collapses of SVB and Signature Bank were the second- and third-biggest failures in US banking history, respectively.
While it’s yet unclear if this will be a problem for many banks or just a few, the turmoil it triggered on the markets has cast doubt on whether the expectations of a further major rate hike will come true. At its March meeting, the Fed raised its benchmark interest rate by just 25 b.p. instead of the anticipated 50 b.p. However, the malaise in the banking sector is spreading outside North America, with Credit Suisse adding fuel to the fire. To prevent the bankruptcy of its oldest financial institution that has been around for over a century and to keep its national banking system intact, the Swiss government decided on a radical step, with the country’s biggest bank, UBS, agreeing to buy its ailing rival in an emergency rescue deal.
Fear has taken hold among investors, with the Volatility Index soaring to its highest level since last November (see Fig. 2). Many remember Lehman Brothers, whose failure in 2008 ignited a global financial crisis, and can’t rule out the possibility that history will repeat itself.