Just wanted to assess whether or not there could be a contagion risk of the SVB fallout and what happens next, because Janet Yellen has been pretty categorical in saying that the US government is not going to bail out SVB. So, what happens then?
Well, I think the Fed’s actions today make the risk of contagion much reduced. I think if we had no news over the weekend the contagion risk would be much higher. Now, clearly what they are doing is backstopping all the deposits, all the depositors as well, including those with large deposits. So therefore, I think the risk of there being a bank run elsewhere, because people are concerned that they could lose their money if the SVP depositors lose their money, that has been now substantially reduced. So, I think the contagion risk is much reduced. Now having said all of that, there are a lot of uncertainties about all of this, how this is going to be paid for, this backstopping of deposits, they are talking about a levy on the banking system. What does that actually mean, and, of course, it does still point towards the question of are there other banks that are in a similar situation to SVB who could get into trouble over the next few weeks?
So, now, if you will allow me to say this as well, SVB looks like a bit of a special case. It was a major lender, as we all know, to the technology sector. As those companies have shed labour and started to downsize significantly, their demand for credit has gone down. So, the bank SVB has not been lending as much money to these companies. So, they put a lot of money into the fixed income market, where there have been a lot of losses, of course, in recent months and apparently, they did not do a lot of hedging.
So, it looks like a special case and what the Fed has done today is very positive I think for the long-term outcome here. And also bear in mind, finally, in response to your question here, that the general capital situation of the major banks in the US is far better than it was in 2008, at the time of the global financial crisis.
What are the chances that given what is happening to the US financial market, the Fed actually may be forced to consider a rate hike? The narrative changes. It may be a forced narrative. It may be a compulsive narrative. But the last thing you want to do is that increase interest rates again, which could have an impact on the ALM mismatch further.
I think, as you look at all the factors that would impact the next FOMC meeting and the policy decision that is taken there, this at the margin makes an aggressive rate hike at the next meeting less likely because they are now seeing the Fed and the world is seeing the fragilities that could be being caused and there may be other examples out there that we do not know about. It was Signature Bank also basically closed and was intervened over the weekend as well, and East Coast Bank, all of these, the banking sector risks will make the Fed a little bit more cautious.
So, my view at the margin here is that it makes it much more likely you will get a 25 basis point increase later this month, not a 50 basis point increase and this is one reason why.
The actual action the Fed has taken over the weekend to backstop these depositors and therefore to try to eliminate or at least reduce the risk of contagion is the reason why equities are snapping back and so this situation, the Fed’s response and the view that perhaps they will only move rates by 25 basis points, and maybe the peak in rates now is lower than it might otherwise have been, is good for equities. It is probably bad for bonds as it saw a gigantic rally in bonds on Friday and it is also negative for the dollar.
So, there are more risks out there about other banks being in the same situation but the Fed’s rapid response to this, even though there is a little bit of uncertainty around the edges that we do not quite know, I do think is going to be something that will lead to a very positive reaction by the equity markets, everything else held constant.
