Aurelia Butler

Investing.com — The Federal Reserve’s fingerprints are all over the dramatic collapse of Silicon Valley Bank, and some are calling on the central bank to put further rate hikes on ice as debate heats up on whether a potential banking crisis looms.“Absolutely the Fed should pause [rate hikes],” Will Rhind, CEO and Founder of GraniteShares told Investing.com’s Yasin Ebrahim in an interview Friday.Following the news that SVB Financial Group (NASDAQ:SIVB) had gone bust, investors reined in their bets on a 50-basis-point rate hike in March to 40% from about 80% seen earlier this week, according to Investing.com’s Fed Rate Monitor Tool.“There was always going to be a consequence to raising rates this fast and this high, and people didn’t necessarily know what the consequence would be. “The Silicon Valley Bank is the first thing that has broken, and it’s a direct consequence of rising rates,” Rhind added.SVB – A victim of the Fed’s aggressive rate hikes?The final days of SVB will go down in history as one of the fastest bank runs on record. In just 24 hours, the Silicon Valley Bank saw rapid deposit outflows of $42 billion on Thursday and quickly found itself in a game of catch-up that it ultimately lost after failing to sell assets fast enough to meet withdrawals.But the bank’s problems had a much longer shelf life than just a few days. It was many months in the making, dating back to early days of the coronavirus pandemic, when tech was in-vogue and firms raised huge sums of cash from venture capitalists.With its deep roots in the tech industry, SVB seemed the obvious partner of choice for many of these cash-rich upstarts and tech firms, who ploughed billions into the bank’s coffers, boosting its deposits.At time when ample liquidity was sloshing around in the economy, driven by ultra-low interest rates and fiscal stimulus meant SVB struggled to lend it all out. The California-based lender instead decided to invest the deposits mostly in U.S. long-term Treasury bonds that allowed it to earn a return, albeit just a few percentage points.This worked well when interest rates were low as the price of the Treasuries, which trade inversely to rates, on its balance sheet remained relative stable, but that all changed. The Fed realised that inflation wasn’t transitory and embarked on its fastest pace of rate hikes in more than four-decades.SVB was now left with a real problem: The price of its bonds, which trade inversely to rates, were falling sharply and it wasn’t too long until it was sitting on a ton of low-yielding assets that were underwater.The bank had huge unrealized losses on securities that needed shifting – and quickly. The lender’s tech-heavy customers were already drawing on their deposits as rising costs and rates started to bite.The lenders solution was to sell its low-yielding long-term bonds and buy short-term bonds that were now boasting much more attractive yields amid a determined Fed keen to push rates to restrictive levels as fast as possible.The bank unveiled this remedy to shareholders in letter, estimating a $1.8 billion loss on the sale of its bond portfolio, and also detailed plans to raise about $2.25 billion in capital to shore up its finances.But the bulk of investors and clients weren’t willing to wait around. Ignoring the call to “stay calm,” from SVB CEO Greg Becker, clients stepped up the pace of withdrawals, leaving the lender staring down the abyss of insolvency.Political Pressure Beckons for Powell?The debate now for investors is whether this is a ‘one-bank issue,’ or something systemic. There is some evidence to suggest there may be more SVBs out there.  Customers Bancorp (NYSE:CUBI), First Republic Bank (NYSE:FRC) and New York Community Bancorp (NYSE:NYCB) were among a list of 10 banks, outlined by Morningstar, that are holding unrealized losses and face large hole in their finances if they are forced, as SVB was, to sell.The threat that something systemic could be brewing in the banking system, forcing many regional banks out of business isn’t going to be well received in Washington. And the likely respond may come in the form of intense political pressure on Federal Reserve Chairman Jerome Powell to cease rate hikes.“If the response to raising interest rates is putting regional banks out of business, then politically that becomes very tough because a lot of politicians will be putting pressure on the Fed, saying that it is unacceptable, you have to stop,” Rhind said.While market participants have reversed course on a 50-basis-point rate hike, they don’t believe the Fed will throw in the towel on hikes just yet and forecast another 25bps rate hike in March even if the inflation report next week comes in hot.“Even if inflation surprises on the upside next week, we believe that the Fed will ultimately conclude that risks have become more two-sided, and moving in 25bp increments is the most prudent path,” Jefferies said.Still as the debate heats up on whether we’re staring down the barrel of another potential banking crises, there is some shared consensus that the Fed’s heavy hand has played a role in the bust of SVB, resulting in the largest bank failure since the 2008 global financial crisis.“While this episode is not emblematic of a banking crisis, it is emblematic of the financial cracks and unintended consequences to the fastest rate hikes since the 80s,” Wei Li , Global Chief Investment Strategist at BlackRock (NYSE:BLK), said in a post on Friday. 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Hunt will limit the relief to three years and propose a permanent replacement in the ruling Conservative Party’s manifesto before the next election, the report said.Under this replacement full-expensing regime, companies will continue to save 25 pence on their tax bill for every 1 pound invested, the report said. A previously announced increase in the headline rate of corporation tax, to 25% from 19%, is due to come into force in April. “For the manufacturing industry… those capital allowances work, so I would say, we do want to bring down our effective corporation tax, the total amount people pay,” Hunt said earlier today in a GB News interview, referring to measures which allow companies to offset capital expenditure against their tax bill.Hunt is due to present his budget on Wednesday.($1 = 0.8314 pounds) More

Investors have lowered interest rate expectations in response to a jump in unemployment, cooling wages and anxiety over the collapse of Silicon Valley Bank, with most now predicting a 0.25 percentage point increase from the Federal Reserve this month.Just this week, investors were betting that the Fed would crank up the pace of its interest rate rises after a number of strong economic data throughout February. Following testimony from Fed chair Jay Powell to Congress on Wednesday, in which he said the bank was prepared to return to bigger interest rate rises to fight inflation, the chances of a 0.5 percentage point increase in March rose to nearly 80 per cent, using calculations based on fed fund futures cited on Eikon. But by Friday evening, they were at 28 per cent, meaning a 0.25 per cent increase was heavily favoured.The shift followed a mixed monthly employment report from the world’s largest economy. While US employers added 311,000 jobs in February — lower than January, but more than the expected 225,000 — the unemployment rate ticked up for the first time since October. The report also showed that average hourly earnings increased 0.2 per cent versus the 0.3 per cent expected, hinting at less pressure from wages on inflation.“The jobs report is weaker than it appears on the surface. Although the headline number was strong, if you look at the details — the wage growth, average hourly earnings — those figures give the Fed the ability to continue on the 0.25 percentage point path, versus what markets had been expecting a few days ago,” said Greg Davis, chief investment officer at Vanguard.“There has been a significant repricing today — in part because of the jobs number and in part because of Silicon Valley Bank.”The jobs data will be a crucial piece of the Fed’s calculus when it meets on March 21-22. After a series of 0.5 and 0.75 percentage point increases last year, the Fed in February raised interest rates by 0.25 percentage points. Accelerating the pace would represent a big deviation in Fed policy and would suggest that the peak in interest rates may be far higher than the 5.3 per cent currently being priced in by markets. The shift has not just been in expectations for March, noted Davis. Earlier this week, investors had been pricing a peak in interest rates at nearly 5.7 per cent in September. A peak of 5.3 per cent is now expected in June and between one and two rate cuts priced in by year-end. “The labour market is moderating more slowly than expected,” said Michael Gapen, chief US economist at Bank of America. But he said: “This report does not suggest re-acceleration in the economy. It suggests resilience. That’s a world in which 0.25 percentage point increases in interest rates are appropriate.” Adding to the volatility on Friday was news that Silicon Valley Bank, a California-based bank serving venture capital and tech start-ups, would be shut down by regulators. The crisis at the bank had led to a flight to safety in markets with investors selling bank stocks, and buying up Treasury bonds. The two year Treasury yield, which moves with interest rate expectations, has fallen by 0.49 percentage points since Wednesday evening. Its move on Friday — roughly 0.3 percentage points — was the biggest one-day fall since 2008. While the problems at Silicon Valley Bank are not thought to be evidence of widespread systemic issues in the bank sector, it has still affected market expectations for the Fed. “SVB is adding some angst to markets,” David Kelly, chief global strategist at JPMorgan. “Does the Fed really want to add on when inflation is clearly subdued? There is not a thing in this data today suggesting the Fed should raise by 0.5 percentage points.”Matt Freund, co-chief investment officer at Calamos Investments, added: “When you are draining liquidity from the market — and clearly the Fed is doing that — it affects the shallower, more fragile markets first.”That was evident in the crypto market collapse, said Freund, which took down crypto-focused bank Silvergate this week and is now appearing in places like Silicon Valley Bank, which is more exposed to venture capital. “This may be another indication that the Fed has gone far enough,” said Freund. More

WASHINGTON/NEW YORK (Reuters) – The rapid unraveling of SVB Financial Group has blindsided the banking industry after years of stability.The collapse on Friday, the largest bank failure since the 2009 financial crisis, had a unique set of circumstances but raised questions about hidden weaknesses that could have consequences for customers and employees and potentially highlight issues in other banks.SVB’s plight could lead to a loss of confidence, tougher regulation and investor skepticism about the financial health of smaller banks that were seen as adequately capitalized after regulators forced banks to hold more capital in the aftermath of the 2008 crisis, experts said. Sheila Bair, who headed the Federal Deposit Insurance Corp (FDIC) during the global financial crisis, said in an interview that bank watchdogs are likely now turning their attention to other banks that may have high amounts of uninsured deposits and unrealized losses, two factors that contributed to SVB’s quick collapse.“These banks that have large amounts of institutional uninsured money…that’s going to be hot money that runs if there’s a sign of trouble,” Bair said. A sequence of events led to SVB’s failure including it selling U.S. Treasuries to lock in funding costs due to expectations of higher rates, resulting in a loss of $1.8 billion. SVB, which did business as Silicon Valley Bank, also had 89% of its $175 billion in deposits uninsured as the end of 2022. The FDIC insures deposits up to $250,000. Investors and customers now face a nervous wait to see if SVB bank finds a buyer quickly. During the 2008 financial crisis, Washington Mutual found a buyer immediately. But for IndyMac, in 2009, it took about eight months. The speed of the SVB crash blindsided observers and stunned markets, wiping out more than $100 billion in market value for U.S. banks in two days. “Banks are opaque, so immediately, we all go ‘wait a minute, how interconnected is this bank to another one,'” said Mayra Rodríguez Valladares, a financial risk consultant who trains bankers and regulators. “Investors and depositors do not want to be the last ones turning out the lights in the room, so they have to leave.”TOUGHER RULESSeveral experts said any ripple effects in the rest of the banking sector may be limited. Larger institutions have more diverse portfolios and deposit clientele than SVB did. SVB also had a high level of reliance on the startup sector. “We do not believe there is contagion risk for the rest of the banking sector,” said David Trainer, CEO of New Constructs an investment research firm. “The deposit base from the major banks is much more diversified than SVB and the big banks are in good financial health.”Jason Ware, chief investment officer for Albion Financial Group, said linkages to the overall banking system are limited but “this situation has perhaps implications for select regional banks with some direct exposure.” Other experts said the failure could bolster efforts by U.S. regulators to tighten rules.The banking sector steered through the COVID-19 pandemic, thanks in part to tougher rules put in place following 2008. However, during President Donald Trump’s administration, some rules were eased. Those easier rules for regional banks are likely to come under greater scrutiny as watchdogs look to ensure they too have enough cushion to weather similar stresses, some regulatory and industry sources said. Senator Elizabeth Warren, a prominent bank critic, tweeted that the bank’s failure “underscores the need for strong rules to protect the financial system.” One area of particular focus could be larger regional banks, which saw some rule relief under the Trump administration. U.S. banking regulators said in October they were considering new requirements on large regional banks, including holding more long-term debt to weather losses.”It does feel like the first place that the market is going to look is to regional banks that don’t have loan diversification,” said Greg Hertrich, head of U.S. depository strategies at Nomura.Another requirement that could garner more attention, industry sources said, was expanding which banks are required to account for the market value of held securities. That requirement currently only applies to banks with over $250 billion in assets, but could grow to include other firms. On Monday, FDIC Chairman Martin Gruenberg warned bankers gathered in Washington that firms are facing higher levels of unrealized losses, as rapid interest rate increases have driven down the value of longer-term securities.“The good news about this issue is that banks are generally in a strong financial condition… On the other hand, unrealized losses weaken a bank’s future ability to meet unexpected liquidity needs,” said Gruenberg, three days before SVB announced its need to raise funds. More