It’s Over For SVB – And the Fed

Treasury, the Fed and the FDIC will make all depositors of Silicon Valley Bank and Signature Bank whole. The Fed has initiated a new Bank Term Funding Program, a super discount window that lends cash for one year against the full value of depreciated Treasuries, MBS and agencies. This solves the balance sheet problem that killed SVB, but not the income statement problem that has collapsed net interest margins. And to be effective, banks need to be willing to use BTFP without fear that doing so will be a stigmatizing signal to wary depositors. The systemic risk is a flight to bank quality in which all smaller or regional banks are abandoned by depositors. Relationships with such banks are sticky, but anything is possible in a panic. At minimum, this will lead to a speed bump in credit activity. Our “house of brick” characterization of the economy indicates this would not trigger a hard landing. This probably ends the Fed’s tightening cycle, the scorched-earth pace of which is responsible for this crisis in the first place.