March 13, 2023 | 2 MIN READ

Weekly Market Update

Read our latest update from 3/20/23: Unintended Consequences

SVB Shakes Up Markets; Wakes Up Officials

What happened last week?

As the collapse of Silicon Valley Bank (SVB) caught investors by surprise:

  • The S&P 500 lost -4.50%
  • The Dow Jones slid -4.44%
  • The Nasdaq composite decreased -4.71%

On Sunday, the Fed, Treasury Department and FDIC announced that SVB’s depositors would have access to all their money on Monday and no losses associated with the resolution of SVB would be borne by taxpayers.

The Fed will make additional funding available to banks through a new Bank Term Funding Program that will make loans up to one year in maturity to banks that pledge high quality collateral such as Treasuries and mortgage-backed securities.

3 Things to Know

A large failure

The Federal Reserve, Treasury Department and FDIC took unprecedented steps Sunday evening to ensure access to deposits at the two lenders that failed this past week, Silicon Valley Bank (SVB) and Signature Bank. They’ve drawn the line: Regulated banks will not default on deposits.

Policymakers’ actions should forestall further US bank runs at institutions that had similar balance sheet profiles, as well as to regional and smaller banks whose businesses could be impacted if deposits flowed “upwards” to systemically important banks.

The cost of making uninsured depositors of SVB and Signature Bank whole will be a levy on the banking industry.

Avoiding a much wider panic is well worth this cost. While we expect this will help stem a social-media age confidence crisis, it’s not clear if the two banks are the sole institutions that will be resolved by regulators.

In our view, these recent events underscore the unanticipated weaknesses caused by the Fed’s rapid rate rises, quantitative tightening and impatience with inflationary pressures.

Panic can be a very potent fundamental — when rational or otherwise. The overall US banking system is much more strongly capitalized than it was prior to 2008/2009. US regulators have been preparing for this moment since the Great Financial Crisis.

All US banks, and particularly larger, more systemically important ones, meet strict capital requirements and undergo severe annual stress tests.

This doesn’t mean every bank has been wisely and prudently managed. And even if depositors are protected, it doesn’t mean the same for bank equites or even unsecured credit.

Other actions taken by the Treasury and Fed will help banks A new one-year lending facility called the Bank Term Funding Program will allow banks to receive loans to bolster liquidity.

An important feature is they will receive the credit for pledged Treasury and mortgage-backed securities at par, rather than a price that has potentially been deflated by Fed rate hikes of the past year. This is, of course, comparable to the price if held to maturity, and can limit mark-to-market losses for banks.

Macroeconomic partly to blame

Many have gone out of their way to note the highly unusual business model of SVB. This is true. Still, US macroeconomic policies bear some of the blame for these events.

US Treasury Secretary Yellen noted that rising interest rates used to combat the inflation caused, in part, by excessive liquidity used to support the economy over the pandemic were a core problem for Silicon Valley Bank.

Its assets, including bonds, mortgage-backed securities and loans made to venture-backed companies, had mark-to-market losses in the face of rising rates.

Fiscal and monetary easing was drastic in 2020–2021 and Fed policy tightening in 2022 was equally drastic. Fed stress tests never included scenarios of surging policy rates. Stemming an unexpected confidence crisis will not stop the US economy from slowing in the months ahead for reasons we discussed in our latest CIO Bulletin.

The shaky ground bank investors feel and the actual economic slowdown to come should help Fed officials see that their hiking cycle is nearing completion. This is even as they hope the latest liquidity boosting steps will allow them to keep monetary policy and regulatory policy separate.

Read our latest update from 3/20/23: Unintended Consequences

Citi Global Wealth Investments
Charlie Reinhard - Head of North America Investment Strategy
Lorainne Schmitt - North America Investment Strategy

See our weekly CIO Strategy Bulletin for more details