Weekly Business Insights from Top Ten Business Magazines | Week 288 | Shaping Section | 2

Extractive summaries of and key takeaways from the articles curated from TOP TEN BUSINESS MAGAZINES to promote informed business decision-making | Week 288 | March 17-23, 2023

The SVB Collapse Threatens an Already Fragile Economy

By Christopher Condon | Bloomberg Businessweek | March 15, 2023

Listen to the Extractive Summary of the Article

Take a tour through US recessions of the past 50 years, and it’s hard not to wonder whether Silicon Valley Bank will turn out to be the banana peel that upends an already unsteady economy.  When the Federal Reserve is raising interest rates, as it is now, recession is always a risk. And slumps tend to come suddenly after an unexpected shock deals a blow to confidence during a particularly vulnerable time.

More often, higher rates reveal hidden weaknesses, especially after a period of easy money or an influx of financial sector deregulation. Sectors that are over-leveraged, investment funds with heavily concentrated exposure or banks with too much risk get exposed as the proverbial naked swimmers when the tide goes out.

Many are asking now whether the spectacular collapse of Silicon Valley Bank and two other lenders in the past week will tip the US into recession. Economists so far are responding with a cautious “probably not.”  SVB, Signature Bank and Silvergate Bank, the three lenders that shut down in early March, were unusual in two related ways. Both their borrowers and depositors were heavily concentrated among technology companies. That sector expanded too rapidly during the pandemic and is already shedding workers, even as the rest of the economy continues to add jobs.

Additionally, the three banks had made significant purchases of long-term US Treasuries, a bet that surely looked safe after the onset of Covid-19, when the Fed lowered interest rates to almost zero and signaled it would keep them there for an extended period. But a sudden surge in inflation in 2021 and into 2022 forced the Fed into a series of aggressive rate hikes that slashed the market value of those long-term Treasuries.

3 key takeaways from the article

1. Many are asking now whether the spectacular collapse of Silicon Valley Bank and two other lenders in the past week will tip the US into recession. Economists so far are responding with a cautious “probably not.”  
2. SVB, Signature Bank and Silvergate Bank, the three lenders that shut down in early March, were unusual in two related ways. Both their borrowers and depositors were heavily concentrated among technology companies – the sector expanded too rapidly during the pandemic and is already shedding workers and the three banks had made significant purchases of long-term US Treasuries – a sudden surge in inflation in 2021 and into 2022 forced the Fed into a series of aggressive rate hikes that slashed the market value of those long-term Treasuries.

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Topics:  Banks, Markets, Economy, Inflation, Regulators, Recession