Noor Capital | Mohammed Hashad Interview on Dubai TV – 13 March 2023

Interviewed on Dubai TV, Monday, Mohammed Hashad, Head of Research and Development at Noor Capital and member of the American Association of Technical Analysts, commented on the most important developments in global financial markets on the first day of this trading week, most notably the collapse of the US Silicon Valley Bank:

The world has woken up to the collapse of a well-known bank, Silicon Valley Bank. Asked what could be happening now and whether there are aspects of similarity to what happened in 2008, Hashad noted that a widespread state of panic and confusion dominated the markets after the news of the collapse of the Silicon Valley bank, which was greatly reflected in the latest reading of the VIX, known also as “Fear Index”, which recorded 34 points in one session. Hashad believes that the Silicon Valley bank scenario is completely different from what happened in 2008 for several reasons:

Firstly; the types of risks do greatly differ, and secondly: the reasons are entirely different, as what happened in 2008 was in mortgage-backed assets, and there was excessive use of securitization technology, plus there was excessive trading in financial derivatives.

Also, in 2008, what is known as bad loans, high-risk loans, or sub-prime appeared, and these had a clear reason to push forward towards an eventual crisis. The credit rating agency also made a mistake in classifying real estate bonds as safe or with a high degree of safety.

Hashad added that what happened with the Silicon Valley Bank is completely different, as the bank put all of its money or a large portion of the deposits it received from its customers at the end of 2022, with approximately $175 billion, which it invested in long-term government bonds. After the Federal Reserve raised interest rates, the bank found itself facing a difficult choice, and found that the interest as well as benefits owed to depositors are much greater than the interest it gets from bonds, and therefore it was forced to sell a large amount of bonds with great losses.

Asked whether is it expected that this crisis could impact other banks and What solutions could be found, especially since the government has indicated that it will not bail out banks directly, as happened in 2008, Hashad explained that this contagion is likely to spread to other banks, as it has already begun to spread to “Signature Bank” and “Silvergate”, which makes one believe that this will spread, but not on a large scale, among banks of small size only as depositors flock or panic when depositors withdraw their money.

As for the proposed solutions, Hashad believes that the best solution is for a larger bank to buy this stumbling bank, and there could be also a prompt intervention from the US government, for the Treasury to pump a rescue package to protect the banking sector from collapsing. It seems that this is what happened in Britain, when HSBC acquired the British branch of Silicon Valley Bank.

Asked whether interest rates constituted the main reason behind the Silicon Valley bank crisis and whether this could mean that the US central bank will deviate from raising interest rates during its looming policy meeting, Hashad does not believe that raising interest rates is the main reason behind the Silicon Valley bank crisis.

Indeed, Jerome Powell raised interest rates seven times in one year, which led to the losses for US banks amounting to nearly $ 650 billion in the value of bond acquisitions, but what mainly happened with the SVB was a fatal mistake as the bank had great flexibility in dealing with startups in the technology sector and has been lending heavily even to those companies that do not have good free cash flows.

Therefore, Hashad believes that with regard to interest rates, we may face some calm in the upcoming March 22nd meeting, but during the next three meetings we may see interest rates raised by 25 basis points in a row, bringing interest rates to approximately 5 to 5.5%. However, this may remain dependent on the method adopted in order to deal with the crisis.