In simplest terms, the swift collapse of Silicon Valley Bank (SVB) and Signature Bank in the U.S. was a direct result of higher rates and the speed at which those rates were implemented. It was a true Black Swan event – no one saw it coming. In fact, Jerome Powell, chair of the Federal Reserve of the U.S., testified just days earlier that the banking system was safe.

It all started when SVB’s clients began withdrawing funds to meet their own liquidity needs. This caused SVB to raise funds by selling a $21 billion dollar fixed income portfolio, which had dropped significantly in value because prices drop when yields rise. SVB did not hedge the risk of this very large bond portfolio even though rates had climbed throughout the last year. SVB then found itself in a position of having to raise new funds.

Soon after announcing their situation, there was a bank run at SVB and fears of contagion in the banking sector. However, the US federal government quickly came out stating that all depositors will be protected, stabilizing the system, and sending a strong and much-needed signal to the marketplace.

While Powell had recently stated that rates would need to be higher for longer, this Black Swan event is expected to thwart efforts by the Fed to tighten interest rates. Goldman Sachs has now changed its expectations for the Federal Reserve’s next meeting on March 21/22., which they had previously predicted would be a 0.25% increase. They now expect a rate pause.

While Goldman Sachs expects the US could still raise rates this year, it sees “considerable uncertainty about the path.” It is now possible there will be rate cuts to protect the financial system, although the decisive decision to protect all depositors may give the Fed leeway to still increase rates by 0.25% later this month. The U.S. inflation number comes out on March 14 and will be a factor in what happens next.

The failure of Silicon Valley Bank and Signature Bank has significant implications for the banking sector in the US, but the fallout will also be felt here in Canada.

>>> Once the events began to unfold, yields began to tumble hard. Fixed mortgage rates are based on the bond market so these dropping yields could influence fixed mortgage rates here in Canada. We will have to wait and see how the Banks react.

>>> Even if the Fed does raise rates at the end of this month, it’s very likely that here in Canada our rate pause will be maintained. Our inflation is not as strong as in the U.S. and rate hikes here have a swifter impact because of higher consumer debt loads.

>>> The Canadian banking section is not considered at risk because of how they are regulated. They are required to maintain certain liquidity ratios and hold adequate liquid assets on their balance sheets.

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