Silicon Valley Bank (SVB) and Silvergate did not fail due to the Fed’s tightening, nor due to the accounting policies of ‘hold to maturity’ of long-term bonds. They fell due to poor asset and liability management and a lack of knowledge about depositors. Namely, aligning short-term cash deposits of start-ups, which survive on capital injections from venture capital funds, with bonds recorded on the principle of ‘hold to maturity’ is certainly not responsible risk management, emphasizes Hrvoje Stojić, chief economist of HUP in this week’s Focus of the Week.
After clients of the bank noticed that deposits were ‘melting’, a wave of deposit withdrawals (bank run) ensued, prompting SVB to sell bonds at a loss to pay out deposits, and the bank simply ‘deflated’.
In any case, the Federal Deposit Insurance Corporation (FDIC) and the Fed quickly reacted with the intention of protecting deposits over $250,000 and liquidity lines. Strong interventions are necessary to prevent numerous start-ups from running out of funding, as this would lead to a wave of bankruptcies in an already difficult situation for technology start-ups.
The collapse of SVB could prompt government institutions to consider the venture capital and start-up sector as a source of systemic risk, threatening to disrupt the long-term symbiosis between the American economy and the technology industry. Increased instability in the financial system now threatens an even stronger slowdown of the American economy or even a recession in the event of stress in the segment of numerous smaller banks.
Accordingly, many analysts believe that the Fed will at least temporarily pause interest rate hikes to avoid jeopardizing multi-institutional efforts to stabilize the banking sector. Additional nervousness is brought by the reduced outlook for rating movements for the entire American banking sector at the credit agency Moody’s.
Estimates from major investment banks (JP Morgan and others) suggest that disrupted credit activity could negatively impact GDP growth by 0.5-1.0 percent in the upcoming quarters, which is consistent with the economy entering a recession by the end of this year.
All of this suggests that the Fed’s policy of raising interest rates is nearing its end, if future instabilities in the economy even allow for it. Financial markets are even betting on a reduction in interest rates this summer, according to HUP’s analysis.
