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Interest rates & liquidity challenges drive collapse of two regional banks

By Steve Lowe, CFA, Chief Investment Strategist | 03/14/2023


On March 10, regional bank Silicon Valley Bank (SVB) collapsed and Signature Bank, another regional bank, was closed by regulators over that following weekend. The Federal Deposit Insurance Corporation (FDIC), Federal Reserve and US Treasury created a backstop to protect uninsured deposits at the two regional banks. The failure of these two regional banks shook investors on Monday, March 13, as they looked at factors behind the collapses.

Steve Lowe, Chief Investment Strategist at Thrivent, shares insights below.

Silicon Valley Bank and Signature Bank had narrow, unique business profiles

Silicon Valley Bank and Signature Bank had business profiles different from most banks, with Silicon Valley Bank focused on start-up firms and technology companies, and Signature on the cryptocurrency industry. In addition to a relatively narrow customer base, both banks had an overly large share of uninsured deposits. (FDIC insurance typically covers the first $250,000 in deposits, so anything over that amount is considered uninsured.)

As concerns increased about the banks’ financial profiles, clients with uninsured deposits rushed to withdraw money, precipitating a liquidity crisis at the banks. Silicon Valley Bank and Signature Bank both suffered from large deposit outflows in a very short time period and were unable to bolster their financial standing before regulators shut them down.

Rising rates put pressure on borrowing and lower liquidity

Interest rates have risen substantially over the past year after a prolonged period of low rates. As a result, the cost to borrow money has increased, which has tightened financial conditions and lowered liquidity. This can create stresses in a certain part of the markets. In the case of Silicon Valley Bank, many of their clients were start-up companies dependent on fundraising and they began to withdraw their deposits as their investments consumed cash. At the same time, higher interest rates decreased the value of the bank’s longer-maturity bond portfolio, which was subject to market pricing. To meet withdrawal demand, Silicon Valley Bank attempted to raise equity funding to strengthen its financial position, but was unable to proceed due to volatility in its stock price. This led to depositors withdrawing their deposits rapidly, resulting in intervention from regulators.

Regulators stepped in to stabilize banking system

The FDIC stepped in and said it will protect all depositors from losses, including depositors who had deposits in excess of the current $250,000 limit on insured depositors. Any losses to the Deposit Insurance Fund, which is the private insurance provider devoted to ensuring the deposits of individuals covered by the FDIC, will be recovered by special assessments on banks.

The Federal Reserve Board also made additional funding available to banks to help them meet the withdrawals of depositors. This step helps the banks turn assets such as Treasury bonds and mortgage-backed securities into cash as needed. This so-called Bank Term Funding Program provides loans to banks for up to a year in exchange for collateral, such as Treasury bonds. The collateral will be valued at par (face value of the bond) versus market value, which for many bonds has declined given higher interest rates.

These steps help stabilize the banking system by ensuring banks have the liquidity to meet withdrawals and by protecting depositors.

Markets watch for signs of stresses in banks with similar profiles

Markets are concerned that banks with similar business profiles could be stressed and subject to deposit runs along with concerns about unrealized losses in investment securities, such as Treasuries. These banks include smaller regional banks, particularly ones that specialize in servicing start-up technology companies and venture capital firms. The steps taken by the FDIC and Federal Reserve should help prevent failures by guaranteeing access to deposits and thus stemming deposit outflows, and by providing funding to banks to improve liquidity. Shareholders and unsecured creditors such as bondholders, however, have not been protected from losses.

Currently, the banking system as a whole is very well capitalized. Rising interest rates, however, can result in stresses in financial markets. Unlike the financial crisis in 2008, the current situation is focused on a few smaller regional banks that have liquidity problems.

Investors should keep their long-term goals in mind

It can be unsettling whenever the markets experience unexpected volatility, but making a quick decision is rarely a good idea. Your financial advisor can be a great resource to help you keep your long-term goals in mind as you determine if you want to make adjustments to your investment portfolio.

Steve Lowe, CFA
Chief Investment Strategist

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All information and representations herein are as of 03/14/2023, unless otherwise noted.

The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Thrivent Asset Management, LLC associates. Actual investment decisions made by Thrivent Asset Management, LLC will not necessarily reflect the views expressed. This information should not be considered investment advice or a recommendation of any particular security, strategy or product. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon, and risk tolerance.

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