Pollack Snapshot: Silicon Valley Bank Collapse and more

By: Elliott D. Pollack & Company, The Monday Morning Quarterback, Court, Merritt, Pollack & Stevenson

PHOENIX, ARIZONA, MARCH 15, 2023 — Silicon Valley Bank, the 16th largest bank in the country and which has a large operations center in the Valley, collapsed over the weekend and was taken over by the FDIC. The stunning move in just a few days brought attention to vulnerabilities in certain parts of the banking system as interest rates continue to rise.

SVB was a unique situation where the bank focused on startups, venture capital firms, and tech companies. Deposits surged at the bank after the pandemic that left tech companies flush with cash. However, it invested much of that cash in longer-dated securities whose values have declined as interest rates increased. Because of the tech slowdown over the past year, its customers started to burn cash and pull deposits at an aggressive rate. Last week SVB tried and failed to raise additional capital, signaling to its depositors that it was running out of cash. The result was a classic run on the bank as customers started to pull money from accounts that were above the FDIC’s $250,000 insured limit. The FDIC quickly stepped in on Friday.

There is still much to be learned from the SVB collapse. There appear to be a few potential sources of the problem: mismanagement by the bank including the investment in long-term securities, its concentration in one primary set of customers, rising interest rates, and perhaps the rollback of federal banking regulations for regional banks approved in 2018 by the Trump administration. For now, the Wall Street Journal is reporting the federal government will cover all deposits at SVB rather than just the standard $250,000. The Biden administration indicated that taxpayers would not bear any of the losses associated with the closure of the bank.

While the SVB collapse has hit banking sector stocks and raised concerns about how the sector will handle the rise in interest rates, the government’s quick actions appear to have alleviated any further economic fallout and panic by depositors at other banks. The next few weeks will see if these results are borne out.

CPI estimates for February are due tomorrow. This may dictate the next steps to be taken by the Fed.

U.S. Snapshot:

  • February’s employment report showed the economy remained resilient for another month. The U.S. Economy added 311,000 jobs for the month, well above the 225,000 estimated. Despite downward revisions to December and January, the economy has added over a million jobs in the last three months. Seven supersectors gained jobs; three lost jobs and one had no change. Leisure and Hospitality added the most jobs with 105,000 jobs.
  • Earlier last week, the Fed Chair, Jerome Powell, said data would drive the size of the next interest rate hike. The economy added 311,000 jobs, and the unemployment rate increased from 3.4% to 3.6%. Those measures continue to show how tight the labor market remains and are likely to push the interest rate hike from 25 to 50 basis points for the subsequent increase.
  • Job openings fell by 410,000 to 10.8 million, well below expectations showing how tight the labor market is. The number of hires outpaced separations from 6.4 million to 5.9 million. Another indicator points to a larger increase by the Fed.
  • As higher rates are expected, consumer credit increased by $14.8 billion in January. Most of the increase was in revolving credit (credit cards), $11.2 billion, while non-revolving credit increased by $3.6 billion.

Arizona Snapshot:

  • New employment data for Arizona was released for January and with that the revised figures for previous years.  Arizona employment was revised upward, with an increase of 15,000 in 2022 and 12,100 in 2021. The revisions brought the growth rate for 2022 up to 4.2% from 3.7%. Similarly, Greater Phoenix and Tucson saw upward revisions to 2021 and 2022.
  • Maricopa County’s residential home sales improved in February but remained below last year’s level. New home sales increased nearly 24% for the month but were down 4.8% from a year ago. The number of resales jumped 31% for the month but was down almost 40% from last year’s sales volume. The median resale sales price has remained consistent over the past few months.