It seems the interest rate hikes orchestrated by The Fed (the U.S. central bank) are finally showing their effects, but not as expected. The old “rule of unintended consequences” kicked in on Friday as troubles in the U.S. banking sector bubbled to the surface. First it was Silicon Valley Bank (a lender to tech startups in Silicon Valley) taking losses on its bond portfolio along with a hurry up recapitalization that failed, followed by crypto-friendly Signature Bank and Silvergate Capital. We hasten to point out that none of these banks is very large, nor are they systemically very important. But, there is the knock on effect of loss of trust in financial institutions, all over again, loss of any unique or highly-specialized services performed by those banks, as well as depositors’ and borrowers’ funds being tied up in limbo as regulators work to sort things out.
It is possible, based on wild speculation on our part, that this event may give The Fed reason to contemplate a more dovish stance on future interest rate hikes. There are likely other institutions close to breaking as a result of the rapid rise in interest rates over the last year, and keeping the pedal to the metal in this regard may precipitate further problems. Secondly, it is reasonable to expect some tightening of financial conditions (a reduction in bank lending being prime) for a variety of reasons which could help to do The Fed’s job for it. There are many ways to slow the economy and that is one of them.
The 2008 – 2009 financial crisis, which we remember as if it was yesterday, was a system-wide failure in The U.S. as a result of fraud and related abuses by banks and non-banks alike. By contrast, this appears to be a result of poor risk-management within certain individual banks rather than a system-wide failure.
No doubt more information will come to light. It’ll take some time for everyone to settle down and know the facts. In the meantime, there will be endless speculation as to what could happen or who will be next. The media, in its efforts to “inform” will push the most sensational headlines, so be prepared.
For our part, we are nibbling to varying degrees in the U.S. banking sector. This is pretty much what things look like when the market dips, and we tend to like dips.