The collapse of Silicon Valley Bank last week has seen share prices slashed for many regional and mainstream banks around the world. While an outright banking crisis has so far been averted markets remain extremely tense and risk averse, and the collapse of any more banks could easily reignite the fears that gripped the financial world over the weekend.

140223 GBP Chart

Gold saw strong gains across the weekend, nearing the UK all-time high.

US authorities stepped in to guarantee customer deposits at SVB, and President Joe Biden tried to reassure markets yesterday that the system was robust and protected from the kind of banking crisis seen in 2008 when the Lehman Brothers collapsed. SVB wasn’t the only casualty however with Signature Bank also collapsing on Sunday evening.

Faced with similar volatility in the UK, mainstream bank HSBC announced a takeover of SVB’s UK branch. The move was met with mostly positive response from tech start-ups throughout the UK who faced significant losses and outright bankruptcy should deposits with SVB have been lost. HSBC paid just £1 for the takeover, a seemingly good deal considering SVB UK was in a healthy position compared to its US arm.

The efforts of authorities to reassure markets has done little to help so far though. Many banks around the world have suffered a stock sell-off and are still facing significant withdrawals. Bloomberg calculate that $465 billion has been wiped off financial stocks globally, with small regional banks in the US particularly effected. While customer deposits have been protected by the Federal Reserve, investors are being left out of pocket in the case of SVB and Signature Bank, driving them to look for safer places to park their money.

Markets are expected to calm somewhat today, but the situation remains extremely fragile. Should any more cracks appear, such as the collapse of any more banks due to customer/investor withdrawals then the fear would continue to spread. As with SVB, many banks are sitting on loss-making assets, and if forced to sell these to fund withdrawals it could easily turn the weekend’s fear into a real banking crisis not seen since 2008.

Due to the chaos of the past few days, the Federal Reserve could also be pressured into slowing or pausing the hiking of interest rates at their next meeting. With inflation so high and the US market looking healthy (until this weekend) the consensus was for further rate rises. Given the pressure high rates have put on banks like SVB however, the Fed may be wary of hiking rates further. If it’s a choice between high inflation and banks collapsing the Fed will of course prefer the first, but it is only the lesser of two evils and will spell further trouble for the US economy if inflation is allowed to remain high in the name of protecting banks.

For precious metals the volatility has seen a spike in demand from investors and pushed gold to a monthly high of $1,914.90 per ounce yesterday evening. In the UK this saw gold just £15 off the all-time high set in February. If the Fed do decide to pause – and eventually cut – interest rates then this would almost certainly see the dollar slump and gold climb above $2,000 and potentially to new all-time highs around the world.