The collapse of Silicon Valley Bank (SVB) in America dominated the news headlines and shook markets on Thursday and Friday last week.
Being the 16th largest bank in the US with $209 billion in assets (as of December 31, 2022), the bank had an undiversified deposit base as it exclusively banked only with the US West Coast tech sector.
As the Federal Reserve System continued to lift interest rates over the past months, tech start-ups are finding it challenging to access funds from venture capitalists and started to draw on deposits saved in SVB.
In order to facilitate the increase in deposit withdrawals, SVB had to sell its government bond holdings from its 'Hold to Maturity' portfolio, which was purchased at low interest rates and had substantial losses in market value due to rate rises.
On Friday, US regulators (the Federal Deposit Insurance Corporation) took control of SVB and placed it into receivership.
As a result of the bank's failure, equities fell sharply, with the Standard and Poor's 500 down 1.4 per cent on Friday, following -1.8pc on Thursday.
Sharp falls have been seen in bank stocks, with the Invesco KBW Bank ETF down 11.1pc over Thursday and Friday.
At the same time, the two-year Treasury yield fell 47 basis points to 4.59pc, and the 10-year yield by 27bps to 3.70pc.
In order to stabilise confidence in US banks and avoid a spread of depositor flight, the Federal Reserve Board announced on March 12 that it will make additional funding to eligible depository institutions through its new Bank Term Fund Program (BTFP), which will offer "loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging US Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral."
Prior to the collapse of SVB, the market priced in the possibility of a 50bps hike in March, given the mixed payroll reports.
Headline payrolls were much stronger than expected, with 311,000 jobs created in February compared to 225,000 expected.
Average hourly earnings for production and non-supervisory workers were stronger at 0.46pc month-on-month after being 0.3pc in January.
On the other hand, jobless claims - which include people who have received unemployment benefits for a week or more - have risen by the most since November 2021.
Some suggest that the rise in claims might be temporary due to the severe weather across the Midwest and California being the likely driver behind the gains.
But others argue that the claim number will continue to rise as the severance pay periods for all the technology employee layoffs come to an end.
The talk of a 50bps hike has lessened sharply, and markets now only ascribe a 32pc chance, down from 71pc on Wednesday.
- This article does not take into account the investment objectives, financial situation or particular needs of any particular person. Before acting on any advice contained in this article, you should assess whether it is appropriate in light of your own financial circumstances or contact your financial adviser. Christopher Hindmarsh is an adviser at JBWere Limited. JBWere Limited AFSL 341162.
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