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What Bank Closures May Mean for Markets
March 22, 2023 - 2 MINUTE READ
With the recent closures of Silicon Valley Bank and Signature Bank, all eyes are now on the Fed to see if these recent events will influence their trajectory of rate hikes. News is still coming out about what happened at the banks but lets dive into what we know so far.
Over the past few years, Silicon Valley Bank experienced massive deposit growth, mostly because of a boom in venture capital. The bank invested in long-dated bonds when yields were at all time lows but with the Fed increasing interest rates, those bonds were losing value. 1 When SVB failed to secure additional capital, they sold these bonds at a $1.8 billion loss. This caused panic to investors and clients, with them rapidly withdrawing their deposits. The bank was seized by regulators last Friday and that’s when we saw other regional banks stocks go down.
The state of California and US government acted quickly, ensuring customers their accounts were safeguarded by FDIC insurance. 1 FDIC covers up to $250,000 per depositor, per bank, per account ownership category. The Fed, FDIC, and treasury also issued a joint statement confirming they would cover those who have more than the $250,000 and they would have access to their money as of Monday. The major difference from what happened in 2008 is these recent events stemmed from a liquidity issue and not a solvency crisis. 1 Regulators also created the Bank Term Funding Program to serve as an additional resource for banks to meet demands.
The Fed is set to meet next week and now faces the dilemma whether to continue raising interest rates or hit the pause button. Inflation remains too high, and unemployment remains at an all-time low- which suggests more rate hikes. 1 In this case, the Fed may have to choose between financial stability and maintaining inflation expectations.