Contagion Effects of the Silicon Valley Bank Run

TL;DR

This study examines how the Silicon Valley Bank failure triggered contagion effects across the banking sector, highlighting vulnerabilities like uninsured deposits and unrealized securities losses, and analyzing investor expectations and differential impacts on bank sizes.

Contribution

It identifies specific bank vulnerabilities contributing to contagion and provides insights into investor expectations and the differential impact on banks of various sizes.

Findings

Uninsured deposits and unrealized securities losses significantly impacted contagion.

Banks with worse stock performance post-SVB had prior lower returns after rate hikes.

Negative spillovers affected most banks except the largest ones over time.

Abstract

This paper analyzes the contagion effects associated with the failure of Silicon Valley Bank (SVB) and identifies bank-specific vulnerabilities contributing to the subsequent declines in banks' stock returns. We find that uninsured deposits, unrealized losses in held-to-maturity securities, bank size, and cash holdings had a significant impact, while better-quality assets or holdings of liquid securities did not help mitigate the negative spillovers. Interestingly, banks whose stocks performed worse post-SVB also experienced lower returns in the previous year, following Federal Reserve interest rate hikes. Stock investors appeared to anticipate risks associated with uninsured deposit reliance, but did not foresee the realization of implied losses. While mid-sized banks experienced particular stress immediately after the SVB failure, over time negative spillovers became widespread except for the largest banks.