The failure of Silicon Valley Bank and Signature Bank this past weekend sparked concerns over banking stress contagion. The jury is still out on whether it’s a few bad apples or the whole cart but taking no risks, governments were quick to emerge with monetary disinfectant on Monday. An article in the FT summed up the probable outcomes of the bank failure and its subsequent policymaker remedies. 1 Here’s what they might lead to and what it might mean for gold.
The SVB episode is likely to increase funding costs for banks, especially smaller regional banks. It highlighted the issue of Held-to-Maturity2 assets and in addition, the recent aggressive run up in interest rates has not been accompanied by a similar rise in deposit rates. The sensitivity of the latter to the former is known as the deposit beta. It has been low for a while. 3 A drive by banks to retain deposits could materially drive up the rates paid on them. With funding costs higher, and reports of deposits moving from smaller, regional bank to large too-big-to-fail institutions, banks are likely to curtail some lending too. This would lead to a further tightening of financial conditions. VC and tech companies and their founders and executives may find less understanding institutions than SVB reputedly was.
The second scenario could be a reticence by the Fed (and potentially other central banks) to continue on their aggressive policy path, particularly as impact of policy tends to arrive with a lag as we have seen. The sizeable collapse in the 2-year Treasury yield (-61bps, largest drop since Oct 1982) and the implied fed funds terminal rate (-80bps) suggests as much (Chart 1).