Truthfully no one knows what’s going to happen as a result of the collapse of Silicon Valley Bank. Expect a lot of volatility, though, as the “smart money” tries to talk specific scenarios (watch out for shorts bearing expert commentary) and as the most likely scenario shifts from hour to hour.
(I updated this post at 10 p.m. New York time on Sunday night.)
The big immediate question, even after the extraordinary Sunday night decision by Federal officials to guarantee all the deposits at Silicon Valley Bank, even those deposits not covered by the $250,000 Federal Deposit Insurance Corporation guarantee, is what will happen in the Treasury market on Monday.
Bank regulators scrambled all weekend to find a buyer for the big pieces of Silicon Valley Bank and a deal that would give those businesses and individuals with big cash balances at the bank access to their money on Monday–or at least to most of it. (Back-of-the-envelope calculations suggest that a 10% haircut is a likely result.) The FDIC’s auction for the bank has a 2 p.m. Washington time deadline for bids. (So if you haven’t got yours in yet, you’re too late.)
Failing that officials at the Treasury Department, Federal Reserve, and Federal Deposit Insurance Corporation proposed a plan to have the FDIC guarantee all deposits at the bank.
Although the FDIC insures bank deposits up to $250,000, a provision in federal banking law does give the FDIC the authority to protect the uninsured deposits as well if the agency concludes that failing to do so would pose a systemic risk to the broader financial system. In this plan uninsured deposits could be backstopped by an insurance fund, paid into regularly by U.S. banks.
And Sunday night, this plan fell into place. “Today we are taking decisive actions to protect the U.S. economy by strengthening public confidence in our banking system,” a joint statement from the Treasury Department, the Fed, and the Federal Deposit Insurance Corporation said. “This step will ensure that the U.S. banking system continues to perform its vital roles of protecting deposits and providing access to credit to households and businesses in a manner that promotes strong and sustainable economic growth.”
The announcement of this plan beat the first deadline, the opening of Asian financial markets. If those markets had opened without news of a deal or a likely deal, I would have expected turmoil in the market for Treasuries, at the least.
The announcement also met the second deadline, the opening of U.S. financial markets on Monday. If those markets had opened without a likely deal, I would have expected to see cash rush from any bank that might seem even slightly to resemble Silicon Vally Bank and into big money center banks and into the Treasury market. All those buyers would be likely to send Treasury prices higher and yields lower at a time when the Federal Reserve is trying to raise interest rates to battle inflation.
In a slightly longer timeframe–longer than a day or two, anyway–I expect prices for financial assets to move as traders try to figure out whether the risk of a systemic banking system problem would be likely to change the Fed’s decision on raising interest rates at its March 22 meeting. The collapse of Silicon Valley Bank is a direct result of the Fed’s move to raise interest rates (after the central bank kept rates so low for ever and ever, a policy that encouraged risk-taking.) With the fear that another Silicon Valley Bank collapse could be lurking out there just ready to be triggered by a 50 basis point rate increase on March 22, will the Fed decide on a smaller rate increase or perhaps none at all?
As soon as this is posted, I’ll work to complete a longer post on what the collapse of Silicon Valley Bank means for your portfolio. I’ll have that up this evening.