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Silicon Valley Bank saga to force a change in Fed’s policy stance?

Venture Capitalist Vinod Khosla and the OpenAI CEO Sam Altman have been leading a corporate initiative to financially rescue the start-ups affected by the Silicon Valley Bank collapse

Three days after getting featured in the Forbes’ annual list of best American banks, United States-based Silicon Valley Bank collapsed on February 10, 2023. While the US authorities have taken over the bank, the worst banking crisis after 2008 has already created a series of chain reactions in the United States and the United Kingdom, with tech start-ups (SVB’s primary customers) now searching for new investors.

While HSBC has taken over Silicon Valley Bank’s UK operations, in the US, JP Morgan Chase, Citigroup and other legacy banks are witnessing a huge rush of new customers (especially small lenders), who want to shift their accounts from Silicon Valley Bank to these established players.

Stock markets across the world are facing the heat of this banking crisis, further compounded by the closure of another US financial institution, Signature Bank, which got taken over by the Federal Deposit Insurance Corporation (FDIC).

Venture Capitalist Vinod Khosla and the OpenAI CEO Sam Altman have been leading a corporate initiative to financially rescue the start-ups affected by the Silicon Valley Bank collapse.

Silicon Valley Bank, which had assets, valued at USD 212 billion, put the investors’ money in US government bonds. These bond prices go down when the Federal Reserve hikes interest rates, like what the Joe Biden government has been doing to fight off inflation since 2022. SVB’s bond portfolios witnessed value losses, followed by its customers entering the mad rush of drawing on their deposits, which ultimately caused the bank’s demise, as it sold its bond portfolios at massive losses.

Now the analysts are second-guessing themselves over the chances of another round of Fed rate hikes. Goldman Sachs and Barclays expect the regulatory body to not hike the rate as of now.

As the US economy reported solid job and wage growth for February 2023, Fed Chair Jerome Powell had said the response could be a more than an expected rate increase, but it seems that the SVB saga has brought an unplanned change in the Biden government’s approach.

Goldman Sachs informed its clients that it no longer expected the Fed to deliver a hike in its March 22 meeting.

“The interest rate hike of 50bps seems to be farfetched at this stage, especially given the fall of SVB stems on the back of increasing rates over the last year. The fight against inflation is important; however, its cost to the economy and jobs cannot be ignored,” Srijan Katyal, Global Head of Strategy & Trading Services at Abu Dhabi-based financial services firm ADSS, told Zawya.

SVB’s failure could change the Fed’s tightening stance, said Stephen Dover, Chief Market Strategist and Head of Franklin Templeton Institute.

“To the extent that the SVB problem is now under control, barring an unexpected decline in inflation this week, the Fed may hike rates 50 bps at its March 21–22 policy meeting. But if the situation remains volatile and uncertain, then the Fed will be conflicted and may be forced to do less (25 bps) or even skip a hike at the upcoming meeting,” he remarked.

Research firm Capital Economics too said that the ongoing banking crisis could spread through the system as a fundamental loss of confidence triggers widespread deposit flight and a “collapse in counter-party confidence that causes interbank lending markets to freeze”.

“Two things will matter in the coming days and weeks. The first is whether the actions of the authorities are successful in maintaining (or restoring) the confidence of depositors and investors in the US banking system. It’s still very early days, but the moves in pre-open trading look encouraging,” the body remarked.

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