Just when you don't expect it, the 16^th largest bank in the US collapses!

 

Silicon Valley Bank (SVB), a US regional bank who was focused on the innovation economy and primarily served corporations in that sector and the global venture capital system, collapsed. In effect, SVB had a mismatch between its deposits and assets - a general lack of effective diversification, and its failure was the result of how it managed its interest rate and liquidity risk, and its investment portfolios.

 

On Friday, March 10, SVB was taken over by the Federal Deposit Insurance Corporation (FDIC) before markets opened, and on March 12, the FDIC also closed and took control of Signature Bank, a regional US commercial bank with a focus on cryptocurrencies. On March 12, the Federal Reserve, the Treasury and the FDIC guaranteed deposits over $250,000 (in the US, normally only deposits below $250,000 are guaranteed), among other actions. If you would like to read more about the details of the SVB’s collapse please see the attached commentary put out by our CIBC team.

 

Regardless of how or why SVB went bankrupt it's important to understand the implications on the economy and the market. In my view, one of the main outcomes is that it has significantly increased the likelihood of a recession developing sooner than later. The chart below illustrates this better than any words. As you can see on March 1 the expectation was that the Federal Reserve would continue to raise rates until they got to 5.5%. These rates were going to stay high and there would be no Federal Reserve interest rate cuts until 2024. Now it is expected that they will raise one more time and then interest rates will start getting cut in June of this year. That is why you are seeing technology stocks starting to percolate higher this week. We'll talk more about this in future notes.

 

 

I have also included a piece from our CIBC Economics Team entitled "The Pain Threshold".

 

As always if you have any questions please feel free to give us a call at any time.

 

Have a great weekend.

 

Milan

 

 

This includes insights from our partners in CIBC Asset Management.