#Podcast — 13.03.2023

Podcast: US authorities react swiftly to stem contagion risk from the SVB collapse

Grace Tam, Chief Investment Advisor Asia

Blessing becomes a curse for SVB

Tech start-ups have been hammered by the Fed’s aggressive rate hikes. SVB, with its tech-heavy depositor base (concentration risk), saw withdrawal of money and triggered a bank run. SVB had to realize losses from its large holdings of long duration Treasuries (mismatch in assets and liabilities) that built up when yields were at very low levels given prior years of super-strong deposit growth (blessing) that had well-outpaced lending.


What are the latest actions from the US authorities?

The US regulators swiftly devised a plan to backstop depositors, a critical step in stemming a feared systemic panic brought on by the collapse of the tech-focused institution. In a joint statement from the Treasury Department, Federal Reserve and the FDIC early this morning, the authorities announced that all SVB depositors are protected with full access to their money starting from today. The Fed also announced that it is creating a new Bank Term Funding Program that will offer loans of up to one-year to banks, savings associations, credit unions and other institutions aimed at safeguarding deposits.


What are the implications?

US authorities’ targeted and forceful actions alleviate concerns related to uninsured deposits at SVB, while also easing liquidity pressures more broadly among depository institutions. The measures appear to be an essential prescription to resolve funding issues from deposit flight.


While the initial market reaction to the policy response looks favorable, the next few days would reveal the extent of other underlying implications, such as, whether the SVB failure will lead to more competition for liquidity, including rising deposit rates, as well as tighter credit conditions for corporate borrowers.


Despite the stronger-than-expected non-farm payroll numbers released last Friday, market expectation of Fed rate hike has lowered significantly with peak rate expectation reducing from 5.7% last week to 5.1% now. Re-pricing of the Fed’s terminal rate also saw weakening in USD which tends to benefit gold and Asian/EM assets, while investment grade corporate bonds and hedge funds are also more defensive asset classes to deal with market volatility.