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March 2023 - Bank Takeovers, Oh My!

Silicon Valley Bank and Signature Bank last week became the second and third largest bank takeovers in U.S. history and you may be wondering if this is a signal of really bad things to come. 

Not necessarily! While most retail banks have a diverse client base, SVB and SB were overwhelmingly focused on start-up companies and the crypto sector, respectively. Unfortunately, the rapid rise in interest rates reduced the value of SVB’s long term bonds and its capital position, while the crumbling infrastructure of the crypto marketplace hammered SB. The rest of the banking sector has very little exposure to the risks posed by crypto and start-ups, therefore regulators do not expect contagion to affect other banks.

But just in case, “Officials took the extraordinary step Sunday of designating both SVB and Signature Bank,… as a systemic risk to the financial system, which gives regulators flexibility to backstop uninsured deposits”(Wall Street Journal 3/13/23). Consequently, the FDIC will cover ALL deposits at the two banks, rather than the standard $250,000. This action will protect hundreds of start-up companies who might otherwise miss payroll and be at risk of closing. This strikes me as a prudent measure in containing the problem from affecting many different industries and thousands of innocent employees.

Some have speculated these events will prevent the Fed from increasing interest rates this month to further dampen inflationary pressures. I hope that is not the case because inflation is a condition affecting every consumer, but especially the poor. Instead, I expect the Fed to bump rates .25% at least three times by July 2023. Indeed, the bond market has already priced in this exact scenario with a nearly 90% probability.

Later this year, we should see inflationary pressures subside, though not enough to prompt the Fed to drop interest rates. More likely, the Fed will simply discontinue rate increases and watch for the economy to slow. This, in turn, will encourage Wall Street that they can begin anticipating a return to a neutral, if not accommodative, monetary policy.

In short, markets will be bumpy before they stabilize and begin climbing again. In the meantime, hang in there!

The views stated in this letter are not necessarily the opinion of Cetera Advisor Networks LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.