SVB collapse: Should regulators reassess interest rates?

While HSBC has come to the rescue of the UK subsidiary (operational entity) of Silicon Valley Bank (by acquiring it for a meagre £1), it seems it is now time for the regulators to reconsider the interest rate hikes.

Silicon Valley Bank was known for financing technology start-ups, and as the supply of venture capital started to deplete as a consequence of higher interest rates, SVB had to run down their cash balances.

What went wrong: SVB was accepting in more deposits than could be lent to borrowers. As a result they decided to invest in U.S. Treasury securities (considered to be very safe). The rapid increase in interest rates in 2022 and 2023 caused the value of these securities to plunge (being a characteristic of bonds and similar securities; when interest rates go up, prices decline).

Reportedly, traders in the financial markets had given an almost 100% probability to the Bank of England raising rates by 0.25 percentage points at its next meeting on 23 March 2023. However, the current projection is that this likelihood has now fallen to a 71% probability in the wake of SVB collapse and investors are giving up on predictions for further increases in interest rates.

If further evidence emerges that there is financial stress as a result of this past year’s increases in borrowing costs, then this may force the regulators to reconsider their original plans for a rates increase.

“The SVB situation is a reminder that hikes are having an effect, even if the economy has held up so far. Concerns over bank earnings and balance sheets also add to the negative sentiment for equity markets”.

SVB’s collapse exposes the huge carry trade problem (ft.com)