Private Client Group

March 20th, 2023

Fed Steps in to Protect SVB and SBNY Depositors, Bank Problems May Affect Rate Hikes


Was There Just Another Bank Bailout?  Last Sunday, the Federal Reserve, U.S. Treasury, and Federal Deposit Insurance Corp. issued a joint statement declaring SVB and SBNY as “systemic risks,” which from Dodd-Frank legislation in 2008 is a characterization that gives government officials and regulators more flexibility when dealing with the banks. The action went on to make all SVB and SBNY depositors whole, including all those with deposits over the FDIC-insured $250,000 limit. The Fed was hoping this action would also stem the flight of deposits from other regional banks and in turn prevent the crisis from worsening. The Fed went a step further to protect regional banks from insolvency by creating a special emergency facility called the Bank Term Funding Program. Under this program, debt securities like long duration U.S. Treasuries could be used as collateral for cash loans for up to a year, giving banks access to liquidity without having to sell securities at a loss. This emergency capital can prevent a bank from becoming insolvent, but the issue of owning debt securities with fair market value below balance sheet value remains – as long as interest rates are elevated relative to where they were in 2020 and 2021. So, do these actions rise to the level of taxpayer bailout? It really depends on who you ask, but the Treasury Department said “no losses will be borne by the taxpayer,” and bondholders in both banks have no protection. The FDIC said it would make up for losses to its deposit insurance fund with penalties on the banks, but the bigger question is whether those penalties will ultimately result in higher costs for bank customers, which in effect would mean taxpayers do feel the impact.1

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The Zacks Bear Market Survival Kit2

How Problems in the Banking Sector May Influence the Fed – the recent failures of Silicon Valley Bank (SVB) and Signature Bank (SBNY) have led to jitters in the market that a banking contagion – perhaps for regional banks – is a growing possibility. The Federal Reserve and Treasury Department moved to stem the crisis, but understanding the root of the problems offers insight as to why these bank failures may influence Fed policy going forward. Most bank failures historically have been caused by credit risk issues, but SVB and SBNY were unique cases where a run on deposits needed to be offset by selling long duration securities at significant losses. How did these banks end up with large portfolios long duration securities with sizable, unrealized losses? The story starts in early 2020, when extraordinary fiscal and monetary stimulus in response to the Covid-19 pandemic resulted in an explosion of liquidity, which also led to a surge in bank deposits. Banks like SVB that cater to niche markets (in SVB’s case, tech startups and VCs) do not have very diversified deposit bases, and their deposits soared at much higher rates than banks with large amounts of retail customers. This massive deposit growth came at a time when the fed funds rate was anchored to the zero bound, and US Treasuries were paying 2% at most, but often far less. Many banks – not just SVB (see chart below) – heavily invested new deposits in long duration Treasuries and other types of fixed income, which while normally a prudent action, turned out to be a matter of terrible timing. As the Fed encountered surging inflation and responded with rapid interest rate increases, yields across fixed income durations moved higher, deeming the fair market value of many fixed income securities portfolios as lower than balance sheet values:2

 Source: FDIC4

So how may this event influence the Fed? Since we know rising rates were the cause of rapid growth in unrealized losses, it follows that the Fed may feel pressure to rethink their planned path of interest rate hikes, since higher rates would arguably continue to create bigger losses on bank balance sheets. The market is starting to price-in the possibility that the Fed could pause – investors in interest-rate futures markets on Wednesday forecast a 50% chance the Fed would not increase rates at their March 21-22 meeting, which was up from 30% just the day before. Rate cuts also appear more likely in 2023, according to futures markets – markets saw a nearly 70% chance the Fed would cut rates below 4% by the end of the year.

Softer Economic Readings in February Could Nudge the Fed – in addition to problems in the banking sector possibly influencing the Fed, there were some economic data releases in February indicating softer activity. The Core Consumer Price Index (CPI) rose 5.5% year-over-year in February, the smallest increase since September 2021. That’s of course still well above the Fed’s 2% target, but it underscores inflation moving in the right direction. Spending at stores, online, and in restaurants also fell by 0.4% in February following a 3.2% rise in January; the producer price index fell 0.1% in February from the prior month; orders for machinery, appliances, and other manufactured goods fell; and finally, home sales have declined for a year straight. Softer economic data could support a decision to pause rate increases at the March 21-22 meeting.5

What Happens to Your Investments in a Bear Market? Investors should remember that volatility is a natural (if unpleasant) part of the economic cycle, but you can potentially avoid the most harmful hazards of a bear market on your investments by making use of some useful tools we offer in our free guide, The Zacks Bear Market Survival Kit.6

This guide discusses some key tools to prepare for a bear market, including:

If you have $500,000 or more to invest, get our free guide today. You’ll get our viewpoint on the most important moves you can make to weather a recession. Don’t wait—get this guide before the storm hits.


1 The Wall Street Journal, March 14, 2023.

2 ZIM may amend or rescind the “The Zacks Bear Market Survival Kit.” guide for any reason and at ZIM’s discretion.

3 The Wall Street Journal, March 14, 2023.

4 FDIC, Q4 2022.

5 The Wall Street Journal, March 15, 2023.

6 ZIM may amend or rescind the “The Zacks Bear Market Survival Kit.” guide for any reason and at ZIM’s discretion.


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