Stock markets are expected to fall this week on broader fears of contagion among regional US lenders and the bank’s stricken depositors.
The fallout has already caused financial markets to dramatically reverse their bets that the Federal Reserve will raise interest rates by 0.5 percentage points at its next meeting later this month, reducing the likelihood of such a rate hike to 40 percent from 80 percent. early last week.
The White House also moved to reassure markets and bank customers. US President Joe Biden’s chairman of economic advisers, Cecilia Rouse, said she had “full faith and trust” in regulators and that banks were more resilient than at the time of the 2008 global financial crisis.
“U.S. Treasury Secretary Janet Yellen has been in conversation with our regulators, with the Federal Reserve, with the comptroller’s office so they can monitor the situation,” Ms. Rouse said. “And they are very aware of these risks. They have better tools than they had in 2008, and the banking sector has more resilience.”
The president also spoke with California Gov. Gavin Newsom about Silicon Valley Bank and “efforts to resolve the situation,” the White House said.
The collapse of Silicon Valley Bank on Friday (Saturday AEDT) has experts predicting that many depositors will begin transferring their money from regional banks similar to SVB to larger commercial banks on Monday, leading to a new round of bank runs.
Photos of people queuing outside SVB banks and other regional banks that SVB has recently acquired across America were posted on social media. Star hedge fund manager Bill Ackman said he expected “more bank runs to begin” on Monday.
Sir. Ackman said he was told by a trusted source that depositors would only get about 50 percent of their deposits on Monday and Tuesday, with the balance based on realized value over the next three to six months.
“If this turns out to be true, I expect there will be a bank run from Monday morning to a large number of non-SIB (systemically important) banks. No company will take even a small chance of losing a dollar in deposits, as there is no is any reward for that risk,” Mr. Ackman said.
Hedge funds and banks have reportedly bought deposits from SVB, according to Bloomberg.
Bank analysts at Autonomous Research said that while SVB had some unique characteristics – such as a dangerously high concentration of deposits from the venture capital space – its failure was largely a guide to the health of other banks’ deposit levels.
“The bad news is that almost all banks face underwater securities books and deposit outflows. However, both of these problems hit (SVB) far more than other banks,” autonomous analyst David Smith said in a note to clients.
“While (SVB’s) situation was unique in several ways, in others it was just an amplified version of macro issues around rising interest rates and industry deposit pressures that affect all banks to varying degrees.”
The analysts noted that SVB’s peers such as First Republic Bank and Signature Bank were “among those with relatively worse deposit trends” and had the steepest deposit outflows.
The US Federal Deposit Insurance Corporation, which put the bank into receivership on Friday, is expected to lay off most of the bank’s 8,500 employees. That would add to tens of thousands of layoffs in the past two months from the likes of Google, Amazon and Microsoft and Facebook owner Meta.
Official payrolls figures released on Friday (Saturday AEDT) came in below some economists’ expectations, pushing the overall unemployment rate up to 3.6 per cent from 3.4 per cent – the first rise in six months.
Monthly wages also rose at the slowest pace in a year, adding weight to financial markets’ view that the Federal Reserve will now have to hold back from a potential 0.5 percentage point rate hike at its meeting on 21-22. March.
Deutsche Bank’s U.S. economist, Brett Ryan, said the jobs numbers were not yet definitive enough to influence the Fed and that the central bank would hold on to a 0.25 percentage point rate hike to 5 percent later this month.
“While there are some preliminary signs of a slowdown, they are far from evident at this point. The February jobs report is unlikely to sway Fed officials in any direction relative to their previous preferences.”
More importantly, Tuesday’s (Wednesday AEDT) official inflation report is likely to be the “make or break factor” in the Fed’s decision to accelerate tightening.