What Happened to SVB?

Mark’s Market Update – 3/16/2023

Why the SVB Bank failure is good for housing…

BUT, don’t make this simple mistake with your money!!!

1. SVB bought nice, safe US treasuries with depositor funds (this is what they should be doing – and not purchase risky crap like some banks did leading up to the Great Recession back in 2008).

2. Those treasury securities, as rates moved up, were worth less and less and less.

3. Because the value of their investments backing up the depositor funds decreased – they didn’t have as much money to give back when people needed to make a withdrawal.

4. Their primary client base (the tech industry) had seen their usual sources of funding dry up (Venture capital), and started to dip into the monies they had deposited with SVB.

5. This created a slow run on the bank. As SVB had to sell those treasuries that were backing up the deposits at a loss to cover the withdrawals – they realized they needed more capital (cash) – so, when they started to do the things needed to raise capital…

6. That triggered alarm bells with a lot of their clients – and then there was a FAST run on the bank. Boom. SVB bank failure.

Why did it happen? Because SVB did what ALL good banks should be doing: Park YOUR money in a nice safe place where it will earn something but isn’t risky.

The problem is that as the Fed keeps pushing up US Treasury yields by bumping up short-term interest rates, more and more banks are going to see their investments holdings decrease in value – which means all banks who have been parking your money in safe US treasury securities will have less and less money to cover deposits as interest rates move up…and this could be a very, very bad thing…especially if you make the simple mistake of withdrawing your funds from the bank.

The difference between SVB and most banks is that MOST of the clients with SVB had millions of dollars per account (meaning they were not insured by the FDIC). Regular banks don’t see the same type of client base…but that doesn’t matter if everyone wants to withdraw their money.

So – there’s a good chance the Fed may decide to take a look around and maybe pause a little bit…and at the very least, slow down their rate hikes.

Slower rate hikes or no rate hikes will result in mortgage rates decreasing.

This is good for housing. And, what’s good for housing, will be good for your wallet over time.