SVB resolution good for risk sentiment, not return of the Fed Put: Nomura

Risk of contagion, with depositors pulling out their money from smaller banks, will be one of the market’s immediate concerns, according to the analysts. (Photo by Miguel Á. Padriñán/Pexels)

The statement from US Federal Reserve, the Treasury and the Federal Reserve Insurance Corporation (FDIC), assuring protection for depositors of Silicon Valley Bank (SVB), will be incrementally positive for risk sentiment but cannot be seen as the return of the Fed put, according to equity strategists at Nomura.

The Fed put is a general term used for the market’s belief that the Federal Reserve will ease monetary policy whenever the stock markets are on a decline.

In response to SVB’s collapse, the Fed has made additional funding available to depository institutions via a new Bank Term Funding Program (BFTP) through which the bank’s depositors will be protected.

There is a “slightly greater possibility of a pause (in the rate hiking cycle) from the Fed in the coming months,” equity strategists Chetan Seth, Ankit Yadav and Anshuman Agarwal wrote in their report.

Risk of contagion?

The statements from the US regulators will instil confidence in US depositors and in the financial markets, the brokerage’s equity strategists said.

“We think the risk of contagion has decreased significantly,” they added.

The risk of contagion, with depositors pulling out their money from smaller banks, will be one of the market’s immediate concerns after the SVB collapse, according to the analysts.

Also listen: Silicon Valley Bank collapse: What to expect?

Also listen: Silicon Valley Bank collapse: What to expect?

The other two concerns would be the possibility of a takeover of SVB by a larger institution which is likely to be “incrementally risk positive” and the extent of losses that uninsured depositors might have to bear and how soon will they be settled.

Despite the jitteriness, they do not see the US Fed stepping in to support the capital markets. The Dow Jones Industrial Average has fallen almost 7 percent over the past month.

“US inflation is still elevated and the Fed will look to bring it down, and there remains the spectre of a slowdown in US growth/NFPs (non-farm payrolls) over the course of coming months. At 17.2x forward P/E for S&P vs a post-2014 average of 17.8x and pandemic low of 13.6x, we think risk-reward for S&P doesn’t appear attractive at these levels given lurking risks (Nomura economists’ US recession view in 2H23, credit/liquidity events),” they wrote.

Also read: HSBC acquires Silicon Valley Bank's UK unit for £1

In all, it seemed like the markets are back to where they were before the SVB issue surfaced, but there is now a “slightly greater possibility of a pause from the Fed in coming months (due to tightening of financial conditions)”, they wrote. The risks of a US slowdown and recession remain, according to the brokerage’s report.

The equity strategists added that “if the Fed indeed pauses in March – although not the base case of our US economics team – it is likely that the odds of a US ‘soft landing’ scenario might increase.”

If the newly set up BTFP has to bear any losses to support uninsured depositors, then that would be covered by a special assessment of the bank. Also, it will not support any of the shareholders and will support only some of the unsecured debt holders.

Also read: Banking Central | Why an SVB-like crisis is unlikely in India