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The Impact of Current Events in the US Financial Industry

On Friday, March 10th 2023 trading in shares of the Silicon Valley Bank (SVB) was halted as state regulators in California closed the struggling bank and appointed the Federal Deposit Insurance Corporation (FDIC) as the Receiver. All of SVB’s deposits and assets were placed under the custody of the FDIC as it marketed the bank to potential bidders. Subsequently, on Sunday, March 12th, the Department of the Treasury released a press release stating that all depositors of the bank would be made whole and have access to their funds beginning on Monday, March 13th, 2023. Additionally, the Federal Reserve Board announced on Sunday that it was making additional funding available to other depository institutions to shore up customer confidence.

What happened?

Up to 97% of these deposits
were uninsured by the FDIC
as they were larger than
the $250,000 standard insurance limit.

SVB saw a huge influx in deposits starting in 2019, which allowed the bank’s balance sheet to expand rapidly. Total deposits increased almost 300% from $49 billion at the end of 2018, to $189 billion by the end of 2021. Up to 97% of these deposits were uninsured by the FDIC as they were larger than the $250,000 standard insurance limit. Unable to lend these deposits out to its customers quickly enough (SVB’s loan book only doubled in the corresponding period), the bank pursued a strategy of investing the idle cash into mortgage-backed securities and other high-credit-quality assets. Investments increased more than fourfold from $32 billion to $134.5 billion in the two-years between 2019 and 2021, far outpacing loan growth.

Losses then triggered even more redemptions,
until the point that there was a “run” on the bank.

While these investments carried low default risk, they were long-term assets in nature that carried high duration risk. As interest rates rose, these investments fell in value, and as the Fed pursued increasing rates to combat high inflation, the carrying value of these securities quickly deteriorated. Compounding the issue was that SVB’s sophisticated clientele, composed mainly of institutional investors, started withdrawing deposits from the bank around the same time, forcing the bank to liquidate its available-for-sale securities at a loss to shore up liquidity. Losses then triggered even more redemptions, until the point that there was a “run” on the bank. This asset-liability mismatch (short-term liabilities backed by long-term assets) is structurally very different from the cascading defaults from the derivatives charged counterparty credit risk that precipitated the global financial crisis (GFC) over a decade ago.

Are there any Contagion Risks?

…contagion risks are often a result of worsening sentiment…

SVB’s troubles were unique in the banking sector as most commercial banks have a significantly more diversified customer base and hold fewer unhedged long-term investments. SVB was also a victim of its own success as deposits increased far more quickly than the firm was able to manage. These idiosyncratic issues were compounded by a once-in-a-generation inflationary environment that triggered a Fed rate-hike cycle that has pushed interest rates higher faster than any other time in the past 40 years. While many market commentators have rightly pointed out that SVB’s asset base was minute in comparison to the entire banking and financial services sector, contagion risks are often a result of worsening sentiment, and not necessarily of any objective underlying systemic stress. However, while wider risks cannot be completely dismissed at this point, market expectations of a repeat of the GFC of 2008 are very low.

How has the Market reacted?

Bond yields plunged in trading on Monday, while the stock market oscillated heavily between losses and gains, with the S&P 500 ultimately ending the day near flat. The collapse of another small bank, Signature Bank, also increased market jitters, but were quelled by the FDIC, USDT and Fed’s quick actions to guarantee depositors’ assets and set up a facility for further customer withdrawals from other banks. The S&P 500 Financials Sector, however, was down 3.8% on the day as investors exited positions in regional and community banks.

What will the Fed do?

While the Fed was widely expected to raise interest rates by 50 basis points in its upcoming March 22nd meeting before the crisis, the stress in the financial sector has caused many prognosticators to pull back on that number. Traders were assigning an 85% probability of a 25 basis points hike as of end of close Monday. There are credible arguments that the Fed may even forgo a rate hike entirely to placate the market and support sentiment. The medium-term trajectory of the central bank’s rate hike cycle does seem to be prematurely stunted.

What should investors do?

In the medium term, we believe any significant pullback in the banking sector would create an attractive buying opportunity. Banks remain well-capitalized and have sufficient liquidity in the short term to handle most scenarios of increased redemptions and withdrawals. Further, the numerous recent rate hikes have increased the net interest margin for banks as the interest income earned on loans has risen a lot faster than the interest income banks pay on money they have borrowed or taken as deposits. On a broader level, a more dovish Fed is always a positive for the stock market. We believe long-term investors should remain committed to their strategies as the current noise in the market will most likely subside in the upcoming quarters.


ANSA Merchant Bank Limited (hereinafter “the Bank”) has prepared this report which is provided for informational purposes only and without any obligation, whether contractual or otherwise. The content of the report is subject to change without any prior notice. All opinions and estimates in the report constitute the author’s own judgment as at the date of the report. All information contained in the report has been obtained or arrived at from sources which the Bank believes in good faith to be reliable.  The Bank disclaims any warranty, express or implied, as to the accuracy, timeliness, completeness of the information given, or the assessments made in the report. Any opinions expressed in the report may change without notice. The Bank disclaims all warranties, express or implied, including without limitation warranties of satisfactory quality and fitness for a particular purpose with respect to the information contained in the report. This report does not constitute nor is it intended as a solicitation, an offer, a recommendation to buy, hold, or sell any securities, products, service, investment, or a recommendation to participate in any trading scheme discussed herein. The securities discussed in this report may not be suitable to all investors, therefore Investors wishing to purchase any of the securities mentioned should consult an investment adviser. The information in this report is not intended, in part or in whole, as financial advice. The information in this report shall not be used as part of any prospectus, offering memorandum or other disclosure ascribable to any issuer of securities. The use of the information in this report for the purpose of or with the effect of incorporating any such information into any disclosure intended for any investor or potential investor is not authorized.