Silicon Valley Bank - What Really Happened?
The financial markets were shaken by news of Silicon Valley Bank’s (SVB) failure and the implications for other banks and the economy. Since Thursday, when the news first appeared, the S&P 500 fell approximately 2.5%, and the Dow Jones Industrial Average declined approximately 923 point (2.8%). Why did SVB fail and what are the implications?
A step back from all the noise revealed that SVB failed due to a gap in its balance sheet. Apparently, SVB’s investment portfolio lost value as the markets declined in 2022 and their total assets dropped below their total liabilities. SVB attempted to increase assets and close this gap, however, this action alerted the financial markets to problems, leading to a subsequent panic and “run on the bank.”
Luckily for depositors, the FDIC stepped in and will guarantee all depositors’ funds, even those amounts above the FDIC’s $250,000 insurance limit. This action alone should calm investors, but contagian effect is in full force, spreading worries about other bank failures. Keep in mind the financial markets are driven by two primary emotions: greed and fear – and fear is fully at play.
The Silver Lining
There may be a silver lining here, however. SVB’s failure may cause the Fed to reconsider its aggressive interest rate hikes. There is no doubt that the Fed's policy of moderating economic growth (through increasing interest rates) is working, as the failure of SVB can be directly attributed to higher rates. Additionally, the recently announced CPI data came in at 6% for February, which is lower than January’s CPI of 6.4% and continues the downward trend. CPI (a measure of inflation) has steadily declined since June 2022.
Source: Yahoo Finance
Upcoming Fed Meeting
The Fed meets next Wednesday and Thursday, and another 0.25% or 0.50% interest rate hike is widely anticipated. Some analysts even believe no rate hikes might be a possibility given the SVB situation. If the Fed chooses to take no action next week, this may lead to an immediate upward move in the stock market. No matter the size of the hike, the markets are sure to react and volatility will continue.
Pamela Chen is the Founder and Chief Investment Officer of Refresh Investments LLC, a fee-only financial planning and investment management firm with offices in Santa Monica and San Diego, CA serving clients throughout Southern California and the United States.
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