As a follow up to our recent blog post, in the last 24 hours markets received some resolution to the Silicon Valley Bank (SVB) drama. Most notably, the U.S. government enacted the following backstops to protect U.S. depositors:
- The FDIC announced that it will fully back all SVB deposits, and all depositors will have full access to their funds as of this morning. It’s important to note that this is not a bank bailout….this is a depositor bailout. Client funds are being backstopped by the FDIC’s $125B war chest, which is funded by the banks themselves, not the U.S. taxpayer.
- The U.S. Federal Reserve created a new lending facility, the Bank Lending Funding Program (BTFP), which allows banks to raise cash without incurring losses on their investment portfolios. The BTFP will offer loans of up to one year to lenders who post “qualifying assets” as collateral. These assets include U.S. treasuries, agencies, and mortgage-backed securities.
While these actions have helped to restore short-term confidence in the U.S. banking system a number of key questions and concerns remain:
- Has the Treasury gone far enough? As of today, the FDIC has committed to backing all deposits at SVB, but they have not formally raised the FDIC guarantee limit above the current level of $250,000. While this is politically palatable, as it keeps the U.S. taxpayer out of the equation, it could help to explain today’s volatility and lack of confidence we see priced into the regional banking sector.
- How will the Fed proceed going forward? With uncertainty around a critical component of the U.S. economy, it seems unlikely that the Fed can continue their aggressive interest rate hiking campaign without further upsetting the apple cart. This could lead to less hawkish policy action in the near-term, at the risk of allowing inflation to run higher for longer.
- What are the potential indirect relationships that have yet to materialize? We’ve already seen the negative impact of higher rates on U.K. pension funds and now regional banks. One potential area of concern is so-called “stable coins,” which are still relatively unregulated and subject to many of the same risks as bank balance sheets.
That said, for now it appears as though a “Lehman Moment” has been avoided thanks to the quick actions taken by the U.S. Treasury and Federal Reserve over the weekend. However, this does not mean we are out of the woods completely, as many questions remain. Most notably, how will this impact the Fed’s ability and willingness to fight inflation with concerns of a banking crisis looming in the background. We, along with most investors, will be eagerly awaiting the Fed meeting next week to see their reaction and learn more about their potential path forward.
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