An Update on the U.S. Bank Panic

With the recent bank failures of Silicon Valley Bank (SVB), Signature Bank, and Silvergate Bank, uncertainty within the capital markets persists. This, alongside heightened inflation at 6% year-over-year and a tight labor market with unemployment at 3.6%, the Federal Reserve has an important decision on whether they will continue to push rates or take a pause.

Rest assured, this turbulence is not likely to cause further bank runs. SVB and Signature Bank saw an inflow of deposits at an outsized clip during the pandemic, thanks to a low-interest rate environment that fueled tech start-up companies. As deposits came in, these banks’ portfolios became unbalanced as much of these deposits were placed in U.S. Treasurys.

And as the Fed raised rates at the beginning of 2022, the values of these Treasurys began to decline precipitously, causing a significant loss on these banks' balance sheets. Most banks have more balanced portfolios and are not overly concentrated in one sector and therefore are have less risk in this economic environment.

What we do know is the lending environment will likely get more challenging. Because of the bank turmoil, many small and regional banks will likely tighten loan standards as they assess the overall risk of their portfolio, given the change in economic conditions.

As the conditions on the ground are constantly changing, here’s what we are keeping an eye on over the next week:

1. The Fed

The Federal Open Market Committee (FOMC) meets again on March 21-22. They will discuss whether an additional rate hike is needed to combat the heightened inflation. The recent banking crisis and low unemployment are key indicators in the decision, but there is a possibility of a slowdown in rate hikes.

Source: Federal Reserve

2. 10-Year Treasury Rates

The 10-year Treasury has seen a notable decline in the last week, falling to the 3.5% range, a 50-basis point drop since before Silicon Valley Bank’s failure.

Source: Federal Reserve Bank of St. Louis