One Bank Folds, Another Wobbles and Wall Street Asks If It’s a Crisis – ‘Silicon Valley Bank Is Just The Tip of the Iceberg’… UPDATE: Silicon Valley Bank Has Failed, FDIC Takes Over!

by

Update:

via Bloomberg:

We are primarily funded by readers. Please subscribe and donate to support us!

Silvergate Capital Corp.’s abrupt shutdown and SVB Financial Group’s hasty fundraising have sent US bank stocks diving and tongues wagging across the industry: Could this be the start of a much bigger problem?

The issue at both of the once-highflying California lenders was an unusually fickle base of depositors who yanked money quickly. But below that is a crack reaching across finance: Rising interest rates have left banks laden with low-interest bonds that can’t be sold in a hurry without losses. So if too many customers tap their deposits at once, it risks a vicious cycle.

Why Silicon Valley Bank’s crisis is rattling America’s biggest banks

The problems of two small banks on the West Coast are rippling across markets and causing new investor concerns about some of the country’s largest financial institutions.

Why? Three words: rising interest rates.

The Federal Reserve’s aggressive campaign to bring down inflation helped set the stage for major problems at two California lending institutions — SVB Financial (SIVB) and Silvergate Capital (SI) — as an outflow of deposits forced both to sell assets at a loss. Those assets were bonds.

Banks are big investors in assets like Treasury bills because they need lots of safe places to park their cash. Many financial institutions piled into these investments during a period of historically-low interest rates that spanned the early years of the pandemic, as banks took in tons of new deposits and lending was somewhat restrained.

But now the Fed is hiking rates at a rapid clip, with Fed Chair Jay Powell warning earlier this week the central bank may have to speed up the pace of its rate increases to cool the economy further. The problem that creates for banks is simple: higher rates lower the value of their existing bonds.

Views:

Leave a Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.