Analyzing the Ripple Effects - Unraveling the Effects of the Silicon Valley Bank Failure on the US Bank Stock, Corporate Bond, and Loan Market

Abstract

Understanding the severe impact of bank failures on market dynamics is crucial in developing tools to improve overall market stability. Therefore, we examine the impact of the Silicon Valley Bank’s (SVB) failure on different US financial markets. We add to existing literature by quantifying the SVB collapse’s impact on the US bank stock, corporate bond and loan market. Utilizing an event study approach and regression analysis, we find significant negative reactions in the US bank stock and loan market. Surprisingly, the US corporate bond market initially showed positive abnormal returns but reversed to negative returns within three months. The corporate bond market reaction varied by industry and remaining time to maturity. Our findings indicate that banking sector turmoil caused by the SVB failure spilled over to the lending markets, increasing funding costs for firms. Additionally, we conclude that the financial system in the US remains vulnerable to sudden shocks as emergency measures were necessary to prevent further contagion of the crisis to other banks and the broader economy. This highlights the need for further regulatory improvements and contingencies.