US intervenes to shore up SVB deposits, limit financial fallout
10:48 pm Sunday, March 12th, 2023
(Reuters) -The U.S. government announced actions to shore up deposits and stem any broader financial fallout from the sudden collapse of tech startup-focused lender Silicon Valley Bank (SVB), sending U.S. stock futures higher. Following are comments from analysts and fund managers:
CAROL SCHIELF, CHIEF INVESTMENT OFFICER, BMO FAMILY OFFICE, MINNEAPOLIS, MINNESOTA
“The facilities put in place to allow access to non-insured deposits should help back stop an important growth engine of the economy which has already been strained by higher funding costs, layoffs, and concerted efforts to right size businesses and watch cash burn rates.
“Hopefully, this will allow for more discernment of midsized and regional bank shares than the babies-out-with-the-bathwater treatment the vast majority of the segment (received).
“Recent funding market and stock/bond market volatility may add to the totality of the data and allow the U.S. Fed room for a smaller hike. We do not expect them to pause just yet.”
DEC MULLARKEY, MANAGING DIRECTOR, INVESTMENT STRATEGY & ASSET LOCATION, SLC MANAGEMENT, BOSTON:
“The actions by the Fed to shore up the banking system with its new Bank Term Funding Program (BTFP), is a decisive step. It will help stem volatility and significantly limit the threat of contagion. By allowing banks to post Treasuries and other government debt at par, (it) will help lenders avoid distress sales and in turn honor deposits.
“The program is not a bail-out. Shareholders and unsecured debtholders will not be covered and in turn will likely see their positions take a significant hit. As a result, this program can be implemented immediately.
“Regional banks were seeing significant stress as markets worried about a knock on. This move by the Fed affirms the resiliency of the system and that it has a clear plan to assure liquidity and support deposit holders.
ALVIN TAN, HEAD OF ASIA FX STRATEGY, RBC CAPITAL MARKETS, SINGAPORE: “Markets remain unsettled from the SVB failure. US and UK regulators have stepped in to contain the fallout. “The market turbulence sparked by SVB has upended rising market expectations on the Fed rate path. We have US CPI due on Tuesday, which adds to the uncertainty over the FOMC (Fed) meeting next week with the market pulling back from expecting a 50bp hike. The situation is evolving, but volatility looks set to remain elevated in coming days. ANTHONY SAGLIMBENE, CHIEF MARKET STRATEGIST, AMERIPRISE FINANCIAL, TROY, MICHIGAN: “It was imperative that regulators stepped in and decisively acted before markets around the world opened for the week. The fact that SVB and Signature Bank depositors will be made whole is critical in maintaining trust in the financial system and should help stem contagion fears this week. But Yellen made very clear today that the government will not bail out bank shareholders and some unsecured creditors, which should make taxpayers happy. “In addition, the Fed’s facility to offer loans to banks that may see similar issues to SVB should also go a long way in helping back depositors and safeguard the financial system.” STEVE SOSNICK, CHIEF STRATEGIST, INTERACTIVE BROKERS, GREENWICH, CONNECTICUT “The actions taken by regulators should go a long way to assuaging the important concerns about deposits and customers’ ability to meet payroll and other obligations. “It’s certainly a stress relief in the short-term, and we can worry about moral hazard and lax regulation later. “But it’s too soon to give an all clear. Stock and bond holders in SVB and Signature are likely wiped out. That’s a lot of money that simply evaporated, which has to hurt someone. It won’t fully remove the worries about what other banks might be in trouble. “Long story short, (it’s) good news for depositors and markets in the short-term, but I don’t think we’re fully out of the woods. But it also means that 50 basis points (a possible Fed interest rate hike) is off the table.” CAROL KONG, CURRENCY STRATEGIST, COMMONWEALTH BANK OF AUSTRALIA. “Currency markets are still digesting all the news related to the collapse of SVB. The measures announced this morning seem to have calmed markets for now and we are seeing some recovery in risk currencies. Given all the measures taken by the authorities markets should be calmer at least for the time being, but if concerns about regional banks, we could easily see the dollar and Japanese yen rally again. “From the perspective of the FOMC, their concern is still inflation and inflation has not really decelerated. Tomorrow’s CPI will continue to show that inflation remains persistently high. Given what’s happened in the U.S. financial system, a 25 basis point hike is more likely than a 50 basis point hike.” MATHAN SOMASUNDARAM, FOUNDER, DEEP DATA ANALYTICS, SYDNEY: “Even if they bail them out, it’s basically saying that most of these banks are carrying much higher risk than most people thought. Referring to whether it could change the Federal Reserve’s rate tightening path, he said: “Before these bank collapses you would have thought 50 basis points was in play? Does these banks rolling over change that? I don’t think so. At the end of the day, the whole idea of what the Fed was doing was eventually going to break things. “The fact that at the first sign of something breaking, everyone screams bailout, is a bit premature. The Fed cannot do bailouts or rate cuts or any kind of pivot ’till they get inflation down so in theory they have to keep tightening and let the weakness play out.”
JUN BEI LIU, PORTFOLIO MANAGER, TRIBECA INVESTMENT PARTNERS, SYDNEY: “It was a big failure and clearly caused investors concern, but we thought it was very company-specific and about exposure to the pointy end (of markets). It’s not a systemic issue, at least at this point “If the Fed is going to protect the depositor, its probably nothing beyond what’s happening to companies directly involved.” KARL SCHAMOTTA, CHIEF MARKET STRATEGIST, CORPAY, TORONTO: “We think the steps taken by the Fed, Treasury and FDIC will decisively break the psychological ‘doom loop’ across the regional banking sector – and should help negate the likelihood of a funding squeeze in global markets. But, fairly or not, the episode will contribute to higher levels of background volatility, with investors watching warily for other cracks to emerge as the Fed’s policy tightening continues. “Terminal rate expectations should remain below the peaks reached during Powell’s testimony last Tuesday, with a more cautious approach likely in the aftermath of this meltdown.” SHANE OLIVER, HEAD OF INVESTMENT STRATEGY, AMP CAPITAL, SYDNEY: “There is going to be a lot of to’ing and fro’ing in the market in the next little while to see if the measures work. The market is still quite nervous and this will take time to play out. “It seems investors are on edge thinking if this bank has hit trouble, maybe there are others that will be in trouble, too. If it turns out to be a storm in a teacup and it’s over in a week, then the Fed next week will return to what it does which is looking at data and contemplating a 25 or 50 basis point increase in rates. If there are still reverberations, then it would be hard to do a 50 basis points hike even if CPI and retail sales figures justify it.”
NICOLAS VERON, SENIOR FELLOW, THE PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS, WASHINGTON: “This is a bailout and a major change of the way in which the U.S. system was built and its incentives. The cost will be passed on to everyone who uses banking services. It’s possible that the issue is that deposits have never moved so fast and that is what formed the basis of this decision – the outflows at SVB were without equivalent. If all bank deposits are now insured, why do you need banks? This could feed into the debate about central bank digital currencies.” ECONOMISTS AT CAPITAL ECONOMICS: “These are strong moves. In particular, the shift to accepting collateral at par rather than marking to market means that the banks that have accumulated more than $600 billion in unrealised losses on their held-to-maturity Treasury and MBS securities portfolios – and didn’t hedge the interest rate risk – should be able to ride out the storm. “Rationally, this should be enough to stop any contagion from spreading and taking down more banks, which can happen in the blink of an eye in the digital age. But contagion has always been more about irrational fear, so we would stress that there is no guarantee this will work.” HOWARD NEEDLE, PORTFOLIO MANAGER AT WELLESLEY ASSET MANAGEMENT, NEW YORK: “In the short-term a bailout should reduce panic but longer term it can’t be great for the larger money center banks who will face more stiff competition from regional banks, emboldened by the Fed support, as they can now act more aggressively to gain and retain clients or deposits.” JON SAKODA, FOUNDER OF EARLY-STAGE VENTURE FIRM DECIBEL PARTNERS, SAN FRANCISCO: “This is a huge step in restoring confidence in the startup community. Before this move many startups were planning emergency measures which would have likely led to more layoffs and furloughed employees. The government’s actions have provided much needed certainty that everyone can make payroll on Monday.” MICHAEL PURVES, CHIEF EXECUTIVE OFFICER AT TALLBACKEN CAPITAL ADVISORS: “What investors have to expect coming into tomorrow and beyond is that we are going to be dealing with a lot of event risk. There are still going to be lingering questions with other regional banks. “Under such a such a scenario, it’s hard not to expect very high-rate volatility. If that happens it’s really hard to think we’ll have an equity rally.”
GREG MCBRIDE, CHIEF FINANCIAL ANALYST, BANKRATE: “While the Fed has talked about a lot in the past year, until today it has been in the context of monetary policy. But today the Fed acts in the capacity of an even more important role, the lender of last resort, to make sure banks and credit unions have access to whatever cash they need without needing to sell high-quality assets that may be trading for less than face value due to the sharp increase in interest rates. “Still to be determined is the fate of the assets of Silicon Valley Bank. Whether one buyer, or multiple buyers, emerge is still to be determined as of the moment.”
(Reporting by Carolina Mandl, Scott Murdoch, Krystal Hu, Shankar Ramakrishnan, Ira Iosebashvili, Megan Davies, Ankur Banerjee, Tom Westbrook, Herbert Lash, Saqib Ahmed, Elisa Martinuzzi and Rae Wee; Writing by Anshuman Daga; Editing by Kim Coghill and Bradley Perrett)
