Rising rates create banking stress,
but it’s no 2008

In March, two banks became insolvent: Silicon Valley Bank and Signature Bank. These two failures led to increased pressure across the banking system, primarily focused on regional banks.

 

These two collapses were precipitated by The Federal Reserve (The Fed) raising the Federal Funds Target Overnight Rate. The Fed took aggressive measures to lower inflation by raising rates, which resulted in creating unsustainable pressure on the balance sheets of these two banks. In essence, as rates rose, investment values (assets) of the two banks decreased in value, while deposits (funding) became more expensive to obtain.  Depositors began to withdraw their assets to invest in higher yielding securities such as Treasuries. The trend continued as more depositors withdrew funds and eventually this created a run on these two banks which led to insolvency. These two failures created increased pressure on the regional banking system as depositors withdrew funds in a panic.

 

Bank regulators and the Federal Reserve quickly took action to calm fears. Regulators insured all deposits at the two failed banks. The Federal Reserve created a lending facility, The Bank Term Funding Program, for banks to borrow to meet all their depositors’ needs. Despite these efforts, many depositors moved their money to larger banks (Money Centers), or into money market funds.

 

The banking stress culminated in the sale of Credit Suisse to UBS in a transaction facilitated by the Swiss government. This sale was engineered to prevent the failure of a much larger international bank that would have created large scale systematic risk across the global banking system.

 

The banking crisis is serious. However, in our opinion, it is not similar to the 2008 financial crisis because it is not currently a systematic risk to the entire banking system.  The failure of the two regional banks was primarily caused by bad management and risk controls.

 

As always, we are available to answer any questions on the economy or your portfolios, and we thank you for your business.

 

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