Deal for Failed Silicon Valley Bank Opens Another Week of Banking Crisis, Inflation Data Also on Tap

© (Getty Images) Aug 7, 2019 Santa Clara / CA / USA - Silicon Valley Bank headquarters and branch; Silicon Valley Bank, a subsidiary of SVB Financial Group, is a U.S.-based high-tech commercial bank

Although the global banking crisis appears to have found a moment of calm, the situation is far from clear as markets face a week of other challenges, with key readings on inflation, the mood of consumers and the state of the housing sector all on tap.

The Federal Deposit Insurance Corp. announced on Sunday that deposits and loans of Silicon Valley National Bank were purchased by First Citizens Bank of North Carolina. The California bank was seized by regulators on March 10 following a rapid run of withdrawals by customers. First Citizens is buying $72 billion of SVB’s assets for about $56 billion. Around $90 billion of assets will remain in receivership with the FDIC.

The collapse of SVB will be the focus of a hearing by the House Financial Services Committee on Wednesday, when Congress will hear from banking regulators on their response to the crisis.

The headline event for economic data is the release of the personal consumption expenditures price index on Friday. The index is a key measure of inflation that the Federal Reserve follows closely.

February’s reading is expected to show inflation abated to a 0.4% monthly pace from the prior 0.6% number. Annually, inflation is expected to have fallen to 5.1% from 5.4% in January.

The Fed has been fighting inflation aggressively with a series of interest rate hikes that have seen its key funding rate rise more than four-fold in the past year. But last week, it chose to raise rates by only a quarter point while noting that uncertainties around the health of the banking industry could lead to a credit crunch in the economy.

“Bank lending standards, which reliably lead credit growth, were tightening even before the latest turmoil,” BCA Research wrote in a morning note Monday. “The need for smaller banks to preserve liquidity in the face of deposit flight, rising funding costs, and increased regulatory scrutiny will only exacerbate this trend.”

“Considering that smaller US banks account for about half of C&I (commercial and industrial) lending and more than half of commercial and residential mortgage lending, a further tightening in credit conditions will weigh on growth.”

Continued improvement in inflation would be good news for the Fed, which is now playing a lead role in the banking crisis, having made available loans and other facilities to banks following the collapse of three U.S. institutions and the forced fire sale of Swiss megabank Credit Suisse to rival UBS bank as well as a sharp decline last week in the stock of Germany’s Deutsche Bank.

On Friday, the Fed reported that large banks had taken in major cash inflows from smaller banks through March 15, but there were reports that withdrawals had slowed as of week’s end.

“There are some concerning signs, the positive sign is deposit outflows seem to have slowed down,” Minneapolis Fed President Neel Kashkari told CBS’ “Face the Nation” on Sunday. “Some confidence is being restored among smaller and regional banks.”

The banks are facing the problems of having government bond portfolios that have lost value as the Fed has raised interest rates dramatically over the past year while depositors at small, regional banks are chasing the higher interest paid by big banks and Wall Street firms’ money market accounts. At the same time, a rush to the safety of U.S. Treasuries along with concerns about a global economic slowdown have driven bond yields down sharply.

“Fed policymakers continue to anticipate raising rates to 5.00%-to-5.25% by 2023 year-end, implying one more quarter percentage point hike this year and no cuts,” Comerica Bank economists Bill Adams and Waran Bhahirethan wrote on Friday. “But, given the obvious risk that the economy underperforms the Fed’s relatively sunny projections, the Fed is more likely than not done with raising rates this year. If so, an initial rate cut would probably come within three to nine months, depending on how quickly a slowing economy reduces wage growth and broader inflationary pressures.”

Another sector that has come under strain from the Fed’s interest rate increase has been housing. The market has seen mortgage rates double over the past year with rates on 30-year fixed rate loans hovering around the 6% mark.

S&P CoreLogic Case-Shiller will issue its monthly index of home prices for January on Tuesday, with another drop in the median national price expected. Monthly pending home sales for February will be out on Wednesday, with a decline from January’s rate forecast.

Also Tuesday, the Conference Board will release its consumer confidence survey for March. It is forecast to show another decline following dips in January and February.

Another consumer survey will come on Friday, with the March sentiment report from the University of Michigan. The final reading is likely to be unchanged from earlier estimates that showed the first decline in four months in February.

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