Fed Rate Hikes Fuel Bank Run at SVB: Why the Fed May Slow Down on Rate Increases
Mortgage News Daily has reported that the average rate on a 30-year fixed mortgage has decreased to 6.57%, down from 6.76% on Monday and the highest point of 7.05% last Wednesday. The 10-year Treasury yield has fallen nearly 40 basis points since last Wednesday, while the average 30-year mortgage dropped from 7% on Thursday to 6.57% on Monday, Yahoo Finance reports. The potential of rate hikes creating difficulties for banks is now a concern for the Federal Reserve, as the institution is not eager to damage the banking industry.
Before Silicon Valley Bank (SVB)’s meltdown, many investors expected the central bank to keep pace with rate increases when policymakers next meet on March 21 and 22. Last week, the focus of conversation was centered around whether or not the Federal Reserve would raise rates by a quarter or a half of a percentage point, similar to their adjustments in February and December, respectively. This was reported on by the Wall Street Journal. Investors, analysts, and experts previously believed that the trend would continue, however, now they believe it will slow down or even be put on hold.
In the second week of March, indicators of distress at SVB prompted a bank run that ultimately led to its downfall. SVB, a bank primarily serving tech, startups, and venture capital, invests clients’ deposits in generally safe securities such as bonds. With the Fed raising interest rates, the value of bonds has decreased. SVB would usually not have a problem; they would just wait for the bonds to reach maturity. Due to a decline in venture capital and tech investment, there is now less available capital and this has led to a reduction in deposit inflows, with clients withdrawing their funds as a result. It became evident that SVB was in a severe lack of funds, leading to fear and eventually causing the bank to fail.
A multitude of factors caused customers to lose confidence and remove their funds from both banks. The Federal Reserve’s rapid succession of interest rate hikes over the last year, in order to combat inflation, had a significant effect on SVB. This was a drastic change from the 14-year period prior, wherein obtaining a loan was much more affordable.
Many of SVB’s clients were simultaneously withdrawing funds.
0. “Mortgage rates tumble in the wake of bank failures” CNBC, 13 Mar. 2023, https://www.cnbc.com/2023/03/13/mortgage-rates-tumble-in-wake-of-bank-failures.html
1. “Mortgage rates are dropping after Silicon Valley Bank collapse. How low will they go?” San Francisco Chronicle, 13 Mar. 2023, https://www.sfchronicle.com/realestate/article/mortgage-rates-silicon-valley-bank-17836939.php
2. “Silicon Valley Bank collapse: Is the Federal Reserve to blame?” Vox.com, 14 Mar. 2023, https://www.vox.com/money/2023/3/14/23640065/silicon-valley-bank-collapse-fdic-interest-rates-federal-reserve
3. “Silicon Valley Bank: Staving off crisis” The Indian Express, 15 Mar. 2023, https://indianexpress.com/article/opinion/editorials/silicon-valley-bank-staving-off-crisis-8497451
4. “What Silicon Valley Bank’s Collapse Says About the Easy Money Era Ending” PBS, 14 Mar. 2023, https://www.pbs.org/wgbh/frontline/article/silicon-valley-bank-federal-reserve
5. “How Covid lockdowns primed the current financial crisis” The Grayzone, 15 Mar. 2023, https://thegrayzone.com/2023/03/15/covid-lockdowns-financial-crisis/