The Collapse of Silicon Valley Bank: Causes and Consequences
The actions taken by the Fed and the FDIC (Federal Deposit Insurance Corporation) have helped contain problems related to U.S. banks, so there should be no lasting impact on financial stability.
Share
Origin of the fall of Silicon Valley Bank
In the case of Silicon Valley Bank (SVB), it is worth noting that the concentration of its deposits in "startups"-which tend to be less stable than those of "retail customers"-was a weakness in its model. -which tend to be less stable than those of "retail customers" - was a weakness in their model.
The ratio of positions (treasuries, bonds, MBS, etc.) considered as "holding" (basically, not accounting for their mark-to-market to the books of accounts), the (basically, not accounting for their mark-to-market to the books), was double the average of the other banks.
Systemic risk limited for now after the measures taken by the Treasury and the FED.
The U.S. Treasury requested the FDIC (Federal Deposit Insurance Corporation), that all depositors and account holders of the intervened banks receive 100% of their money as of Monday, March 13.
Large new facility program by the Fed to provide liquidity to banks with preferential terms.. The Fed created a Bank Funding Program with new terms (BTFP), where banks will be able to deliver high quality instruments (Treasury, MBS) for cash at par value; therefore, they will be able to monetize instruments well above market value.
The actions taken by the Fed and the FDIC have helped contain the problems related to U.S. banks, so there should be no lasting impact on financial stability, and so would the Swiss central bank to support Credit Suisse.
However, increased volatility, the prospect of increased regulation and concerns that tighter credit standards may slow growth, are factors that may weigh somewhat on equity and credit markets and lead to somewhat higher risk premiums.
Finally, we believe that the overall assessment of the economy, monetary policy and the financial system has become more difficult, and that in itself justifies a more cautious approach to risk.
Impact on the Fed's monetary policy
The Fed is not indifferent to these types of events that put financial stability at risk, and for the time being it should privilege that mandate.
Does this mean that the Fed will simply give up its fight against inflation? In principle, while recent developments should make them think twice about the speed of ongoing monetary tightening, it is premature to conclude the end of the tightening cycle (rate hikes). If financial risks stabilize and inflation persists, the central bank can refocus on its price stability mandate, but there is discretion as to the degree of aggressiveness in its implementation.
Now, SVB and Signature Bank's declines should serve as a wake-up call that the Fed has tightened enough. As a result, with the tide of liquidity receding and the pressure this is putting on banks - which may push the U.S. economy into recession - we should also not be surprised if the Fed signals a pause in rate hikes and QT (Quantitative tightening) at upcoming meetings.
