Over the weekend, Silicon Valley Bank and Signature Bank, the second and third-largest banks to ever fail, experienced a bank run, leading to their failures. While both banks are large, they are not deeply interconnected with the market, which is a relief for regulators. However, the failure posed a risk to depositors, particularly those with deposits exceeding the FDIC's insured limit of $250,000. To address this, the Treasury announced that it will employ special measures to ensure that depositors will receive 100 cents on the dollar, and they will allegedly have access to their money today. Additionally, the Treasury announced a new program, the Bank Term Funding Program, to provide additional liquidity to the banking sector and alleviate some of the strain associated with unrealized losses in bank portfolios.
The failure of these two banks, coupled with the February jobs report, which showed declines in manufacturing, IT, and other sectors, has led to a significant shift in rate future expectations. Fed Chair Powell's hawkish rhetoric has been contradicted, leading to uncertainty in the market regarding the Fed's future policies. The questions the market is grappling with now include how high the Fed is willing to go, what the terminal rate is, and how high the Fed needs to go to slow inflation but not crush the economy. The banking sector will be heavily scrutinized for a while, and asset/liability management is a significant risk that regulators may not have considered. Mortgage rates are better today but are lagging behind Treasuries, as mortgages do not like volatility.
Whenever a bank fails, it is usually considered significant, but there are a few noteworthy points to consider regarding SIVB. Firstly, unlike the bank failures that occurred 15 years ago, this was a result of old-fashioned asset/liability management. This type of failure was last seen in the 1970's, not the 2000's. Secondly, it is important to note that this was not strictly due to the creditworthiness of SVB's loan portfolio. While depositors were withdrawing funds, their businesses were not failing at the moment. This may change in the future, but for now, it does not appear to be the case.
Finally, it is worth considering the role of the Federal Reserve in bank regulation, as there seems to be a significant mismatch in assets and liabilities. It is surprising that this was not caught earlier. The situation with SVB escalated rapidly, as their CEO had given a routine investor presentation just a week prior without any questions about the bank's asset/liability mix.
In the short term, 30 year mortgage interest rates have dropped 14 basis points from last week. Hopefully this trend toward lower rates continues as we me forward. This link will provide you with a look at the 30-Year Mortgage Rates Today.
