US Banking Sector Faces Volatility: The Collapse of SVB and Its Implications
Peakview is excited to launch its very first blog post about current happenings and market trends in the commercial real estate industry. As always, feel free to reach out to us to discuss these events and its impact on the industry!
Over the last couple weeks, there has been a significant amount of volatility in the US financial system, particularly in mid-tier and regional banks. On March 10th, 2023, trading for shares of Silicon Valley Bank (SVB) was halted after the share price dropped 68% premarket to $34 on heavy volume. Later that day, regulators took the bank into receivership, making SVB the largest bank crash since 2008. Signature Bank saw customers pulling substantial amounts of deposits from its holdings, leading regulators to take control of the bank on March 12th to stop a banking contagion.
There are various causes and catalysts for the recent bank collapses. SVB's primary business focused on financing technology-related startups, which had seen venture capital raising decline significantly during the last twelve months. This resulted in a broad-based need to withdraw cash from deposits held at SVB. Signature Bank had significant crypto exposure, and a run-on-deposits contagion occurred shortly after news broke on SVB, likely amplified due to Signature’s high proportion of uninsured deposits.
Additionally, the Fed's rapid interest rate hike left banks vulnerable to covering liabilities. Loosening standards in 2018 for mid-tier banks/regional banks through US legislative action made stress-test regulations for mid-sized banks less stringent. While there is a lack of consensus on the implications of deregulation, perspectives fall somewhere in between: (1) the rollback of the stress-tests left the mid-tier banks more vulnerable to adverse economic conditions due to structurally unsound lack of oversight and (2) no stress tests could fully capture the mark-to-market losses from banks' available-for-sale holdings of long-duration Treasuries and securities.
The collapse of these two banks has led to a confluence of factors that tilt risk to the downside. We anticipate the need for caution ahead as central banks remain committed to policy mandates. Today, the Fed continued its ongoing rate hikes, with a 25bps increase, expressing caution about the recent banking crisis and indicating that hikes are nearing an end. Along with its ninth hike since March 2022, the rate-setting Federal Open Market Committee noted that future increases are not assured and will depend largely on incoming data.
It is important to note that the recent bank collapses are not expected to have immediate repercussions on the commercial real estate sector. However, the implications of overtightening monetary policy and the rising inter-bank competition for customers seeking higher rates on savings accounts may create unexpected pressures on smaller regional banks if deposits shift suddenly. To the extent that these smaller banks have meaningful exposure to US commercial real estate, we could anticipate seeing pockets of distress or dislocation due to the potential continuation of tightening US monetary policy.
In conclusion, the market volatility following the collapse of SVB and Signature Bank, as well as the health of the banking sector, weighed heavily into the Fed's 25bps rate hike today. We do not expect a pivot or a pause despite both inflation and labor market cooling slightly in their most recent readings.
