How SVB’s collapse could affect interest rates

The closure of Silicon Valley Bank (SVB) was marked by one of the largest bank run-offs in history. (iStock)

The implosion of Silicon Valley Bank (SVB) and Signature Bank has spread uncertainty across the banking sector and has raised questions about how the Federal Reserve could proceed with interest rate hikes to curb inflation.

In fact, Goldman Sachs on Sunday changed its update and now it no longer believes the Fed will raise interest rates at its next meeting on March 21 and 22.

Following a strong jobs report amid inflation far from the Fed’s target range, some economists predicted that the Fed would increase interest rates by a higher percentage during its next meeting, going from a previous 25-basis point hike to a 50-basis point increase.

"The fast and large increase in rates contributed to the collapse of these banks," Dawit Kebede, a senior economist at the Credit Union National Association (CUNA), said in a statement. "This failure of financial institutions will cause the Federal Reserve to be more cautious about unforeseen events that could cause instability. Moreover, the rates in place are already showing the intended consequences of slowing down investment and consumption."

Any increase to the federal funds rate may impact the costs of products like credit cards. If you’re struggling with high-interest debt, you could consider paying it down with a personal loan at a lower rate. Visit Credible to get your personalized rate in minutes, without affecting your credit score.

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Why did SVB fail?

SVB could have shut down for various reasons including the Fed’s recent interest rate hikes and the investment bank’s own business decisions, according to an analysis by the center-right think tank American Action Forum.

SVB’s client base included start-ups, venture capital firms, fintech companies and other businesses in the Silicon Valley tech sector. At the onset of the COVID-19 pandemic as interest rates dropped to near zero, many of these clients in the tech sector saw significant growth and began making major deposits into SVB, American Action Forum reported. By the end of 2021, the bank had doubled its 2020 assets to more than $100 billion.

During the pandemic, SVB invested heavily in long-term Treasury bonds, the American Action Forum said. However, long-term Treasury bonds are highly susceptible to interest rate risk. And as interest rates rose, the market price on those bonds dropped.

Borrowing money also became more difficult and many SVB clients, in an already troubled sector, took money out of the bank. In fact, SVB clients withdrew $42 billion in a single day, marking one of the biggest bank runs in history, according to American Action Forum.

"SVB’s customer base was extremely poorly diversified, resting largely on health and tech startups in the Silicon Valley area, an industry that collectively lost $7.4 trillion in one year," American Action Forum said in its analysis. "SVB customers began to pull their deposits from SVB in order to meet their liquidity needs, and SVB needed a fast fix to cover this shortfall. Selling its long-term Treasury bonds before they matured, at such a terrible market price, was the warning sign to SVB’s venture capitalists that balance sheet liquidity was dire, sparking a bank run as depositors sought to withdraw their assets."

Following the collapse of SVB, Secretary of the Treasury Janet L. Yellen, the Fed and the Federal Deposit Insurance Corporation (FDIC) said in a joint statement that all depositors will have access to their money beginning March 13 and no losses associated with the government’s resolution on SVB "will be borne by the taxpayer."

Specifically in the cases of SBV and Signature Bank, regulators took specific action in an attempt to make all depositors "whole," the joint statement said.

Regardless of interest rate movements, the closures of SVB bank and Signature Bank have spread fears about the failure of the entire banking system. But in the event that another FDIC-insured bank like SVB fails, the government organization would only reimburse depositors for losses up to a limit.

If you want to take advantage of interest rates before they potentially rise, you could consider paying off high-interest debt with a personal loan at a lower rate. Visit Credible to compare options from different lenders at once.

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How much does the FDIC cover?

The FDIC insures up to $250,000 per depositor, per insured bank, for each account in a covered category. These are the covered account types at FDIC-insured banks:

Checking accounts
Savings accounts
Money market accounts
Certificates of deposit (CDs)
Cash management accounts
Money orders and cashier’s checks

However, the FDIC doesn’t protect brokerage accounts or investments. This means it won’t protect losses from stocks, bonds, mutual funds, exchange-traded funds (ETFs) or other securities. It also won’t cover annuities or contents of a safe deposit box within a bank.

If you’re struggling in today’s economy, you could consider paying off high-interest debt with a personal loan at a lower rate. Visit Credible to speak with a personal loan expert and get your questions answered.

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