The collapse of the SVB brings into play a pause in Fed interest rate hikes


HSBC took over the UK arm of Silicon Valley Bank this morning (March 13) after a spate of withdrawals fueled the US-headquartered bank’s collapse over the weekend.

Silicon Valley Bank UK (SVB UK), which has around £5.5 billion in loans and around £6.7 billion in deposits, was sold to HSBC for just £1 this morning, with the bank saying of England confirmed that all depositors’ money at SVB UK is “safe and sound”.

The BoE said the sale to HSBC was to stabilize SVB UK, adding it would ensure continuity of banking services, minimize disruption in the UK tech sector and boost confidence in the financial system.

“All services will continue to operate as usual and customers should not notice any changes,” the central bank added.

Systemic problems or a bad apple?

The collapse of SVB spooked markets late last week, and a report by Algebris Investments cited last Thursday’s “indiscriminate selling” by US banks. The fear spread to Europe on Friday amid fears of contagion; The S&P 500 is down almost 5% over the past five days and the FTSE 100 is down over 3% over the weekend.

However, the Algebris report found that given SVB’s atypical situation, a spillover to larger US and European banks is unlikely to occur.

The report said that SVB’s expansion into the venture capital ecosystem that had done so much to fuel its growth came at the expense of diversification: “At the end of 2022, its deposit base was US$152 billion (£126 billion). $173 billion (£143 billion) over the FDIC insurance limit.

“In addition, many of SVB’s deposits were invested in long-dated fixed income securities, which fell as interest rates rose, causing both earnings pressure from a negative carry trade and capital pressure from bond depreciation. ”

Hargreaves Lansdown’s Susannah Streeter said the bank’s management had been forced to sell a tranche of its bond portfolio at heavy losses and a proposed capital increase was given the cold shoulder by shareholders.

“In just a few hours, customers lost confidence and started withdrawing money, leaving the bank insolvent, as well as its UK branch,” she added.

Stephen Dover, head of the Franklin Templeton Institute, said over the weekend it was clear what was initially viewed as an isolated bank failure posed systemic risk to the financial system. However, when regulators stepped in, things seemed to cool down.

The BoE implied there would be little impact on the UK banking system, claiming that it remains “safe, sound and well capitalised” and that no other UK banks were directly materially affected by the events.

Consequences for the Fed

Questions have been raised about the impact of the Fed’s rate-hiking cycle on companies like SVB and how its collapse could affect the central bank’s next monetary policy move.

AJ Bell’s Russ Mold stated: “On Thursday, March 11, before the SVB rush, markets were estimating a 68% chance of a half-point rate hike to 5.25% from the US thanks to tough talks. Federal Reserve Board next week on inflation before Senate Banking Committee by Chairman Jay Powell (pictured).

“Markets are now quickly pricing in a quarter-point move or even no hike on March 22nd, and the benchmark 2-year and 10-year Treasury yields are falling rapidly.

“The Fed could now find itself between a rock and a hard place. It wants to tighten monetary policy to keep inflation under control, but will now have to question whether policy is already too tight given this uncomfortable wobble in the banking system and the pressure that higher interest rates are already putting on many companies’ cash flows. “

Vincent Vinatier, portfolio manager at Axa IM, also agreed that the Fed is likely to be more cautious about raising rates.

However, Dover said: “As far as the SVB issue is now under control, the Fed may hike rates at its May 21 policy meeting.”

“But if the situation remains volatile and uncertain, the Fed will conflict and may be forced to do less (25 basis points) or even skip a hike at the upcoming meeting.”

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