Failures of Silicon Valley Bank and Signature Bank: The potential economic and credit implications
OakNorth
March 16, 2023
The well documented failures of Silicon Valley Bank (SVB) and Signature Bank have raised questions about the potential impact on the macroeconomic environment and specific industries. SVB, with $209bn of assets, was the second largest bank to fail in US history (after WaMu during the financial crisis), while Signature Bank had $110bn of assets.
As the situation evolves, we explore the potential implications.
Macroeconomic Impact
Interest rates: Given the stress being demonstrated in the US banking system from high interest rates, market expectations for a further 50bps rate rise at the upcoming Federal Open Market Committee on March 21-22 have vanished. Instead, market consensus is favoring a 25bps increase, with some predicting that the Fed may even leave rates unchanged. Either way, there will be a continued focus on future rate rises given the current high levels of inflation.
Credit Availability: Regional banks, especially those lending to SMEs, may focus on strengthening their funding position by capturing associated deposits (presumably structuring to ensure “stickiness”). Given the actual or perceived risk of flight of deposits to the “too big to fail” banks, lenders may tighten lending standards to increase the risk-adjusted rate of return on more scarce capital. Furthermore, to shore up confidence in the banking regulatory/supervisory system, the Fed is said to be reviewing capital, liquidity, and stress-testing requirements applicable for institutions having assets below $250bn, which were excluded from tougher supervisory measures following the partial repeal of Dodd-Frank Act in 2018/2019. A potential tougher oversight could warrant further focus on risk adjusted returns. On the other hand, borrowers could be hesitant due to the unknown impact of tightening economic conditions and increased focus on cash flow management.
Unemployment: Resilient employment has supported consumer spending over the last year despite inflation, rising interest rates, and geopolitical concerns. SVB’s significant exposure to the tech/startup sectors, which are already experiencing a job market correction, could negatively impact US employment and spending if a lack of ongoing funding support from SVB (or its successors) is seen.
Consumer/Business spending: Even before the SVB and Signature Bank failures, consumer and business spending in the US for 2023 was sluggish. A deepening banking crisis or increased unemployment could further hurt consumer and business sentiment. With many already applying a “recessionary” outlook for 2023, further monitoring is required to see if the impact of these bank failures requires further downgrades.
Inflation: The current weakness in crude oil, natural gas and liquid fuel prices could result in further moderation in inflation if sustained. The latest release of the consumer-price index on March 14 showed CPI for February of 6.0%, down from 6.4% in January. While still high, this was the smallest increase seen since September 2021. Nonetheless, core CPI surprised on the upside, clocking an increase of 5.5% y/y, down only 10bps from 5.6% in January thus tilting consensus in favor of a 25bps rate hike in the upcoming FOMC.
Industries
Commodities: The failures of SVB and Signature Bank have prompted declines in US treasury yields, interest rate expectations (FED swaps), and the USD index. Gold and silver prices have risen due to their safe-haven appeal, while other commodities like oil, natural gas, copper, and agricultural commodities have fallen due to a potential economic slowdown. While the situation is evolving, as it currently stands this would be negative for industries such as O&G extraction, petroleum refineries, and other hard commodities but may benefit gold and silver industries in the short term.
Housing market: A slower pace of interest rate hikes could benefit the housing construction sector, but this may be offset by increased unemployment levels and weaker consumer sentiment.
Infrastructure: OakNorth Credit Intelligence will continue monitoring the impact of Federal funding allocation to infrastructure projects; however, it is too early to reflect any changes to our Base case forecasts.
Working Capital and Capex: Industries with significant capital requirements may face challenges in funding short-term needs due to liquidity issues. Funding gaps could also affect revenue generation capabilities.
In conclusion, the failures of SVB and Signature Bank present potential implications for both the macroeconomic environment and specific industries. As the situation continues to evolve, monitoring these developments is crucial for understanding the broader impact on the economy.