Fed claims its first casualty
Silicon Valley Bank (SVB), a top 30 bank in the country, known for catering to start-ups and their founders, failed. The bank, a publicly traded company, unexpectedly announced on March 9th that they were raising additional capital, causing the stock to sell off precipitously. As the stock sold off, there were reports that several VC firms were advising portfolio companies that banked with SVB to move funds out. This created the classic run-on-the-bank situation, putting further pressure on the company. After failing to find a buyer or secure additional financing overnight, the stock plunged further in the pre-market the following day. The FDIC (the Federal Agency insuring bank deposits) shut down the bank shortly thereafter. Clients will be able to access up to $250,000 of their funds on Monday. However, anything above that insured limit will be subject to receivership. The stock is also likely worthless, and its debt is likely impaired. We have been concerned about smaller and regional banks, primarily due to their exposure to commercial real estate, such as office buildings. While several banks with significant crypto exposure, namely Silvergate and Signature Bank, were already teetering, we had not yet seen any significant pain in the banking sector. As usual, the first casualty of a crisis is a surprise. While there will surely be follow-on effects, the scope of potential contagion is still unclear. Several banks, First Republic and Signature Bank found their stocks under significant selling pressure, with the market concerned about bank runs.
Does this mean the Fed is done?
Earlier in the week, Jay Powell, the Chairman of the Fed, testified in front of congress. (btw if you would like to laugh at the level of unsophistication of some of our governing classes, you can find some examples of their questions on YouTube) In his testimony, he reiterated that the Fed has more to do regarding raising interest rates. The 2-year treasury bond traded over 5% for the first time since 2007 before reversing to close the week at 4.59% after the bank failure news, a massive move for the short end of the interest rate curve. Following his testimony, the market repriced expectations for the Fed’s next interest rate move to 0.50% from 0.25% before reverting after the SVB news. As the Fed embarked on its most aggressive tightening campaign in history, many have been expecting “for something to break” before the Fed paused. With the first large bank failure since the financial crisis and wage growth moderating in the week’s non-farm payroll data, the market now expects the Fed to reconsider its path. We will find out soon enough if this is the case or if the Fed continues to focus on inflation data, which remains elevated.
Latest crypto fallout
Since the FTX downfall in late 2022, many have been anticipating the next shoe to drop, with some notable short sellers setting their sights on Silvergate Bank. Silvergate Bank embraced the crypto community when most other banks did not. Some pointed to a lack of risk leadership and poor controls as a cause for concern. Silvergate announced that they were shutting down on the same day that SVB made their surprise announcement. The market has now focused on Signature Bank, a traditional bank that also embraced the startup and crypto ecosystem as the potential next domino to fall.