- 13th March 2023
- Posted by: Celticfp
- Category: Investment Committee
Over the weekend we saw the escalating news around the recent downfall of Silvergate and Silicon Valley Bank (SVB), which has been attributed to the sharp rise in interest rates, an inverted yield curve and quantitative tightening.
SVB, a popular choice for tech companies to hold their cash, faced trouble after investing heavily in long-term US government bonds. These bonds were considered safe, but their value declined when interest rates began to rise. If SVB held onto the bonds until maturity, they would receive their capital back, but many of their tech customers withdrew their deposits due to worsening economic conditions.
These factors have led to the rapid withdrawal of liquidity from the market, causing some financial institutions to suffer significant losses. SVB, which is the sixteenth largest US bank by assets and a bank for the innovation economy, has banked or is banking half of US-backed venture companies in the technology and life science sectors. The fallout of SVB’s collapse has been felt in various markets, with the Asian markets being relatively stable, while the European and US markets suffered significant losses on Friday, heading into Monday.
Fortunately, the Federal Reserve and the Treasury have acted swiftly to safeguard investors, and the Fed has allowed banks to obtain liquidity through its discount window and set up a new Bank Funding Program which will allow depositors to have to their money from this morning. While shareholders and bondholders in SVB will not be bailed out, the Fed’s emergency measures have helped to restore confidence in the market, preventing further losses.
The impact of SVB’s fall on the larger banks is still uncertain, and the Fed may be prompted to reassess its rate rising path and consider a premature ceasing of quantitative tightening. As a result, the bond market is already pricing in a ‘slower/lower’ rate hike for the March meeting. While the events of the past few days may prompt the Fed to rethink its approach, it remains to be seen whether the Fed will pause its quantitative tightening program sooner than expected.
In summary, while the full impact of SVB’s fall cannot be immediately identified, the swift action taken by the Fed and the Treasury has helped to prevent any major contagion risk. It remains to be seen how the larger US banks will be affected, and the Fed may reassess its approach as a result of recent events. The Celtic Financial Investment Committee will to monitor the situation and provide swift communication in case of any major market reactions.
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This article is for information purposes only – should not be perceived as financial advice. We recommend you should always speak to a financial adviser before making any investment decisions.
Please note, past performance is not a reliable indicator to future returns. Your investment may fall as well as rise, and you may not get back what you put in.