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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.[0] 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.[1] 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.[2]

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.[2] 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.[2] 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.[2]

In the second week of March, indicators of distress at SVB prompted a bank run that ultimately led to its downfall.[2] SVB, a bank primarily serving tech, startups, and venture capital, invests clients’ deposits in generally safe securities such as bonds.[2] With the Fed raising interest rates, the value of bonds has decreased.[3] SVB would usually not have a problem; they would just wait for the bonds to reach maturity.[2] 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.[2] It became evident that SVB was in a severe lack of funds, leading to fear and eventually causing the bank to fail.[2]

A multitude of factors caused customers to lose confidence and remove their funds from both banks.[4] 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.[4]

Many of SVB’s clients were simultaneously withdrawing funds.[5]

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/

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