Korea watches for fallout of SVB collapse amid fears of recession

Posted on : 2023-03-13 17:21 KST Modified on : 2023-03-13 17:43 KST
The South Korean government held a meeting Sunday to review the potential effects of the SVB situation
People stand outside of Silicon Valley Bank in Santa Clara, California, on March 11 reading a notice posted on the door. (UPI/Yonhap)
People stand outside of Silicon Valley Bank in Santa Clara, California, on March 11 reading a notice posted on the door. (UPI/Yonhap)

The sudden collapse of Silicon Valley Bank (SVB) on Friday due to insufficient liquidity and insolvency has drawn attention to real and financial vulnerabilities across the global economy, while bringing to the surface hidden risks within the banking industry.

But analysts said that with the bank in question ranking 16th in the US, there was still little likelihood of the collapse escalating into a risk for the entire financial system along the lines of the 2008 Lehman Brothers bankruptcy.

The US Federal Reserve also predicted the impact on monetary policy would be limited. The South Korean government is watching closely for possible signs of the situation leading to a larger banking crisis.

SVB ranked 16th in the US for asset scale (US$209 billion) as of late 2022. It has now entered bankruptcy procedures.

On Sunday, Bloomberg wrote that as the first bank collapse in the US since the COVID-19 pandemic, it could be read as the first signal of an economic recession.

Some are raising the possibility that a chain reaction of uncertainty could impact smaller-sized banks.

The consulting company Whalen Global Advisors predicted that other banks might suffer liquidity jitters over the next week, adding that some vulnerable banks might have to sell off securities such as US government bonds as more and more depositors are lost. It also noted fears that the growing bond losses could expand throughout the banking industry.

The credit rating agency Standard & Poor’s (S&P) predicted the potential for more depositor losses as the situation leaves smaller banks struggling more to procure funds in the global market. Like SVB, some overseas banks are recording large valuation losses in their bond assets due to sharply rising bond interest rates — which translate into lower bond prices — and that situation could heighten worries of bond-related losses.

Some are also warning that certain vulnerable small banks in the US could become targets of short-selling by investors.

The first victims of the SVB collapse are US startups. Around half of new venture capital-supported enterprises in the US had been doing business with SVB, while 44% of tech and medical venture enterprises listed on the US stock market (as of 2022) were receiving funds from it.

But the risk of the aftereffects extending through the US financial system still appears low. Analysts said one of the reasons SVB collapsed was because of its characteristic high-interest rate deposit structure, with an excessive amount of outlays on interest.

The investment bank Morgan Stanley concluded that the possibility of the situation escalating into a wide-scale banking crisis along the lines of the Lehman Brothers collapse during the 2008 global financial crisis remained low. The situation is not at a level that threatens to create a banking crisis affecting the US economy as a whole, it predicted.

Some in the financial market have been raising questions over whether the situation may affect the direction of the Fed’s monetary policy. But among experts, the predominant view was that the Fed’s tight money approach was likely to continue unless large-scale banks are affected by liquidity issues.

The South Korean government held a meeting Sunday to review the potential effects of the SVB situation.

Participants at the meeting presided over by Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho mentioned the prevailing view among experts that the situation was still unlikely to escalate into a systemic risk for US banks or the financial world in general.

At the same time, they stressed that potential effects on the domestic and overseas financial market and real economy could not be ruled out at a time of increased market volatility due to austerity policies around the world. They discussed plans for the government and relevant institutions to monitor the situation closely and respond swiftly as needed.

An official with one financial oversight institution said, “We are monitoring the Silicon Valley Bank closely not simply as a matter of sharp fluctuations in stock prices, interest rates, and exchange rates but as an event with the potential to directly impact the real economy.”

At the same time, they predicted, “For domestic banks, exposure in relation to SVB will be minimal.”

According to the US Securities and Exchange Commission information website, the South Korean National Pension Service owned around 100,000 shares of the SVB Financial Group (SVB’s parent company) as of late 2022, with an appraised value of US$23.19 million.

By Cho Kye-wan, senior staff writer; Choi Ha-yan, staff reporter; Park Jong-o, staff reporter; Ko Han-sol, staff reporter

Please direct questions or comments to [english@hani.co.kr]

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