Banking Turmoil Underscores Impact of Rate Hikes

by Guy LeBas March 13, 2023
It’s not every day that a top 20 bank in the United States faces a takeover by the Federal Deposit Insurance Corporation (FDIC). In fact, prior to March 2023, it had been 868 days without a bank failure—the longest stretch since the founding of the FDIC.

Bank failure is exactly what happened when the $212 billion Silicon Valley Bank (SVB) closed its doors on March 10, marking the second-largest depository demise in history after 2008’s Washington Mutual. Meanwhile, federal regulators shut down New York’s Signature Bank two days later, citing systemic risks.

SVB and Signature Bank have unique business models, but the financial markets are nonetheless lumping many other financial institutions into the same category. While we do not see similar fundamental risks across the U.S. regional or national banking system, these events represent one way that monetary policy transmits into the real economy, and there will likely be a further chilling effect on credit creation, despite the Federal Reserve (Fed) liquidity program announced March 12.

The causes of these bank failures are complex, but Fed policy clearly played a role, with a series of unusually rapid interest-rate hikes.

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About the author

Guy LeBas

Director, Custom Fixed Income Solutions

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