Impact of Fed's Rate Hikes on SVB
Investors have reduced their bets on a 50-basis-point rate hike in March after SVB's failure, according to Investing.com's Fed Rate Monitor Tool. The Silicon Valley Bank's rapid deposit outflows of $42 billion in 24 hours marked one of the fastest banks runs in history. The bank's problems date back to the early days of the COVID-19 pandemic when tech firms raised huge sums of cash from venture capitalists and deposited it into SVB.
SVB, with deep roots in the tech industry, struggled to lend out the huge deposits it received due to ample liquidity in the economy driven by ultra-low interest rates and fiscal stimulus. The bank instead invested the deposits mostly in US long-term Treasury bonds, which allowed it to earn a return. However, the Fed's fastest pace of rate hikes in over four decades caused the price of these bonds to fall sharply, leading to huge unrealized losses for SVB. The bank attempted to sell its low-yielding bonds and buy short-term bonds with more attractive yields, but rapid withdrawals by clients ultimately led to its failure.
Systemic Concerns in Banking Industry
Investors are now questioning whether SVB's failure is a "one-bank issue" or indicative of a larger systemic problem in the banking industry. Some banks, including Customers Bancorp, First Republic Bank, and New York Community Bancorp, also hold unrealized losses and could face similar problems if forced to sell their assets.
The potential for a banking crisis could result in intense political pressure on Federal Reserve Chairman Jerome Powell to cease rate hikes. Experts believe that if raising interest rates puts regional banks out of business, it will become politically unacceptable, and the Fed will face pressure to stop.
Conclusion
While market participants are not anticipating a halt to rate hikes, the role of the Fed's heavy hand in SVB's failure has sparked a debate on whether another potential banking crisis looms. According to Wei Li, Global Chief Investment Strategist at BlackRock, the fastest rate hikes since the 1980s have resulted in financial cracks and unintended consequences.
