Beware of Contagion Risk from SVB Falls Out

California banking regulators shut down Silicon Valley Bank (SVB) on Friday after the bank, which had US$209 billion in assets at the end of 2022, saw a run, with depositors pulling out as much as US$42 billion on a single day, rendering it insolvent. It is the second-largest bank failure in US history after the fall of Washington Mutual in 2008.

Reuters reported, SVB falls similar to the UK pension fund crisis in September. The firm appeared to be on the wrong side of the surge in yields, leaving it exposed to interest rate risk and unable to meet its liabilities.

Investors looked for vulnerabilities elsewhere and fled other banks where they perceived risks. The KBW Bank index has fallen more than ten percent over the past two days, its worst decline since March 2020.

"Contagion risk stemming from the collapse of SVB Financial triggered a sell now, ask questions later, a backdrop for stocks," says Adam Turnquist, a chief technical strategist for LPL Financial, as quoted by Reuters.

US Treasury Secretary Janet Yellen on Sunday said she was working closely with banking regulators to respond to the collapse of SVB and protect depositors.

"Let me be clear that during the financial crisis, there were investors and owners of systemic large banks that were bailed out...and the reforms that have been put in place means we are not going to do that again," Yellen told CBS News Sunday Morning show.