They say that the first 48 hours is the most likely window to find a missing person, but can the same be said for missing money? If the collapse of US-based Silicon Valley Bank (SVB) is anything to go by, the answer is no.
On the 8th of March, SVB published a statement saying it was seeking to raise US$2.5 billion to prop up its balance sheet, and a mere 48 hours later, US regulator the Federal Deposit Insurance Corporation declared the bank had collapsed.
Just two years ago, at its height in 2021, SVB was worth US$44 billion and managed over $200 billion in assets. Its collapse marks the second biggest banking failure in US history, trumped only by Washington Mutual’s spectacular demise in 2008 during the global financial crisis.
To calm market fears, the US government took immediate action in the form of bailouts, promising no depositors would be left out of pocket while providing emergency funds to American banks to keep the threat of more bank runs at bay.
But while it was bad news for SVB customers (predominantly tech startups) and shareholders, the domino effect may result in a lower peak in Australian interest rates than first expected. How could these two seemingly unrelated subjects have anything to do with each other? Like the unearned success of a nepo baby, some things are more connected than you think.
When interest rates rise rapidly, credit conditions tighten, making it harder for financial institutions like banks to finance themselves. At the same time, the value of their existing loans and assets take a hit. Globally, interest rates have risen aggressively this past year due to inflation. In the US, The Federal Reserve has raised rates from a band of 0.25%-0.5% to 4.5%-4.75% over 12 months. We’ve seen a similar increase here, albeit not quite as extreme, with a current cash rate of 3.60% as of last week.
Though SVB isn’t considered a ‘major player’ in the global finance system, its collapse mimics the warning chirps of a smoke alarm alerting us to the fact that 12 months of incessant rate hikes have weakened the global economy.
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In Australia, the collapse has caused futures markets to reduce expectations around how zealous the central bank will be in increasing interest rates further in the coming months to ensure nothing like this happens closer to home. As a result of the SVB situation, market pricing is now predicting that we’ve already seen the last of the rate rises and that there is likely to be a rate reduction in the latter part of 2023. Just last week, the terminal rate was pointing to a further two rate rises. However, 3 of the 4 big banks are still predicting another rate hike in April.
Still, the US Government’s swift emergency response may prove to have contained any major fallout from the disintegration of the SVB. Whether any apprehension still exists when the RBA board next meets on the 4th of April will be evident in its Official Cash Rate announcement. Until then, America, all eyes are on you.
