The news, as of late, has been dominated by the collapse of Silicon Valley Bank. According to Joe Long, from Guild Mortgage, Silicon Valley Bank (SVB) is a bank that focuses largely on lending to Silicon Valley. Their business practice is a little bit unique as they are a bank rich in deposits and SVB's lending is different from other banks.
Simply explained, SVB bank owned a lot of long-term securities. They were receiving interest over a long period of time and their borrowing costs rose very rapidly. SVB’s cost of doing business rose faster than its ability to keep up. This resulted in SVB becoming insolvent.
When a bank becomes insolvent, there is a process in place where the government steps in and takes control of the bank, stabilizes it, and it is then determined what the best course of action is. Typically this involves finding another bank that is solvent to take over the bank that is insolvent.
Wondering what the impact of the SVB collapse will have on the economy, inflation, and interest rates? Joe shares that this could have an impact on the stock market. Bank stocks were slightly effected on Friday and the following Monday, March 10th & 13th. Schwab Bank had the largest sell-off that was observed. It resulted in a general decline in the stock market, which had some ancillary effects.
A "flight to safety" reaction was noted by some people. Meaning people want to put their money in safer assets, such as bonds. This could result in a negative impact on the stock market, if it doesn’t get cleared up quickly, resulting in deflationary pressure.
What is interesting about that is recently most of the discussions have been about inflationary pressure. So what happened after this collapse on Friday and into Monday was that we saw a rally in the bond market that did put interest rates down in the short term.
So will that hold? Who knows? Today they've already given back some of those gains. The next few weeks and months to come will determine what will happen. The consensus is that it will be handled well and not continue to slide. Ultimately, from an interest rate standpoint, it will go back to what happens with long-term inflation.