The SVB bankruptcy, a painful reminder

The SVB bankruptcy, a painful reminder

The SVB case (i.e., Silicon Valley Bank), a Californian bank specialized in technology start-ups, is shaking up the world of finance and the banking sector. Is there a risk of "irrational" contagion? Probably not. However, it reminds us that counterparty risk is real and proven. It would be a mistake to ignore it on the pretext that banks no longer fail or do not fail. The GFC reminded us of the fragility of the system. After Lehman Brothers, how many banks have not been saved in extremis? When choosing banking partners, and even more so when investing funds, it is best to be sure of the risk of default. Diversification is more important than ever. Here, once again, the sharp rise in interest rates put the bank in difficulty and gradually brought it down. It is worth remembering that the Bales rules are worthwhile and should be applied by all. Fortunately, the systemic European banks seem to be immune to such a risk of massive withdrawals from corporate (or other) clients.

It is obvious that the risk exists, even if some people hide it or refuse to see it. Even more so with local banks, which people think they know even better than others. When a corporate invests by placing funds with a banker, it must ask itself the question of the risk of default. I am always surprised to see how many industries do not use money market funds (ultra short or short term at least) or Tri-Party Repo's to diversify their risks. It's as if some of them don't have an asset management policy in place. After Lehman, the bank bailout and the government crisis, we thought we were safe. The financier has a huge problem: he has a short memory and forgets disasters very quickly. The rise in interest rates was a trigger for the sub-prime crisis and here again the sharp rise in interest rates is starting to weigh on the economy. However, we are seeing few credit defaults in Europe, contrary to what we might have imagined. But the risk is real and latent until the economy shows solid signs of recovery. We are in a kind of transition period, after a long period of turmoil.

Let's hope that the case of SVB remains isolated. It was worrisome in view of its weight and position within the US banking industry. SVB was not a "small bank" in the US. We can hope that the contagion will be limited and contained. But it is up to treasurers to remain vigilant and prudent and to strengthen their selection criteria for banking partners. It is also important to keep in mind the type of products used and not to be afraid to "diversify" even more. Money market funds have shown strong resilience during the recent crises and have been the subject of solid reform. At a time when many companies are "cash rich", it is up to everyone to validate with the C-level the investment strategies and the authorized counterparties to prevent any problem. The worst is never certain in this complicated world. Let's take any situation such as the SVB case as a reminder of the dangers and risks of default. As is often the case, this type of crisis begins with a bank run and a loss of confidence that has a snowball effect and inexorably leads the victim to his or her doom. SVB is the biggest bank failure since 2008 and let's hope it will remain an isolated case. Nevertheless, it is up to treasurers to be cautious because the economic environment remains fragile. SVB also raises the issue of financing a certain type of technology companies and start-ups. We must hope that this does not prevent the banking system from playing its role in financing these essential players in the new economy and digitalization.

François Masquelier – CEO of Simply Treasury – LUXEMBOURG March 2023

Disclaimer: This article was prepared by François Masquelier in his personal capacity. The opinion expressed in this article are the author’s own and do not necessarily reflect the view of the European Association of Corporate Treasurers (i.e., EACT).