What happened, and what may we expect?
Silicon Valley Bank’s (SVB) failure occurred because of the Fed’s most severe hiking cycle in history paired with bank-specific dynamics—namely where the bank chose to invest its money and the bank’s high concentration to tech sector clients. So, does this mean we are headed toward a systemic banking system failure or another Lehman Brother’s moment?
We do not believe so, particularly since most large banks are well capitalized and currently not under stress. That said, we do expect some things to change, especially for smaller banks. For instance, both the Treasury and Fed got things started by providing a new liquidity facility to all banks. The choices SVB made were not entirely unique, so other small banks with similar investment structures will see increased scrutiny. But keep in mind that with SVB client concentration also played a large role in their failure.
We do not foresee a systemic banking system failure—but envision increased scrutiny for smaller banks regarding investment structures.
Regarding our view on interest rates and recession, we believe the pressure is on for the Fed to slow or pause its hiking cycle in order to provide assurance to the market. The expected Fed Funds path has already changed dramatically, with interest rate cuts in the second half of 2023 implying more acceptance of a recession during this period.
Information in this note was informed through a large variety of sources, including Bloomberg, CNBC, Time, the Financial Times podcast FT News Briefing, and others.
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