SVB Situation Explained

After widespread client withdrawals, we are witnessing the second-biggest bank collapse in U.S history. Silicon Valley Bank was a well-capitalized institution with a 40-year history. They are an important institution for the tech and venture capital sector, and it is estimated that 50% of US venture-backed startups were customers of the bank.

SVB and its customers thrived during the low interest era, but as rates rose, SVB was more exposed to risk than a typical bank due to the large book of uninsured deposits. The bank was viewed very positive on Wall street, and Forbes had just named them to their “Financial All Stars List”.

So what happened? The downward spiral began on Wednesday March 8th as investors were summoned to raise 2.25 billion dollars to bring their balance sheet up. The reaction to this news was overwhelming. Customers tried to withdraw 42 billion of deposits in 24 hours.

We can trace back the trouble to 2021. As the tech sector boomed, US venture capital-backed companies were raising record capital (330 billion in 2021 alone), and this was double the amount raised in 2020. SVB increased their deposits by over 100%. Lush wish cash, SVB invested the deposits in the bond market at the peak. Keep in mind the FDIC only insurers $250,000 per customer per bank (in Canada its $100,000).

As interest rates rose, bond prices started to decline. SVB was realizing major losses on these long-term bonds as they were funded with uninsured customer deposits. ***A general rule of thumb is for every one year of “duration”, each 1% interest rate move impacts the price of the bond by: 1% x Duration A. So, a 1% move on a 9 yr duration bond is ~9% +/- on the bond price.

Enter Q4 results, posted earlier this year. Moody’s Investor Service (an established credit rating agency) took notice. They reported SVB was at a significant risk for a downgrade to their credit rating. Once this news broke, SVB looked to increase liquidity measurers. The plan was to sell 2 billion dollars of investments (at a loss) to help their balance sheet. As more and more clients and hedge funds sensed trouble, they began to withdraw their funds at a rapid rate. Large depositors aren’t fully insured by the FDIC as I mentioned above, so they have an incentive to find highly sound and reputable banks (hence to move their money out of SVB). Once the sentiment of trouble begins, large depositors run; hence the term “bank run.”

In a precedent setting move, US regulators have promised to fully protect all depositors, not just insured depositors. All money, even that above $250,000 is now protected.

The four biggest banks in the US lost a combined 52 billion the day before the collapse. Stocks of First Republic bank dropped 15%, 5% for Comerica and 1% for Bank of America.

Impact to Yields

Enter Goldman Sachs. Arguably the most prestigious investment bank in the world. It issued this statement; “In light of recent stress in the banking system, we no longer expect the FOMC to deliver a rate hike at its March 22nd meeting with the considerable uncertainty about the path beyond march”.

How does the above change the bond yields? The bond yield quickly reacted as investors rushed into government bonds for safety. More bond buying = lower yields. J.P Morgan on the other hand is still calling for a 0.25% hike to interest rates at the next US meeting.

The U.S. 2 year dropped from 4.60% (March 10th) to 4.03% (March 13th)

Canada followed US yields. The 2 year is down 0.42%. The 5 year is down 0.55%.

Rate Outlook – USA

The market is now pricing just one 0.25% hike. That is down from a full 1.00% just one week ago.

Rate Outlook – Canada

So what does all this mean for rates in Canada. Securitized deals (insured and insurable) will see immediate relief. We are already seeing relief on rate exception requests, with rates back into the 4% range for 3-5 year fixed terms.

The 5 year bond is down into the high 2% range again.

Another positive outlook is regarding the Bank of Canada’s messaging. Pressure mounted on the US to continue their rate hikes due to re-inflation and Canada may have been forced to raise rates to help the strength of the Canadian dollar. With the sentiment changing in the US, our interest rate pause should hold for the remainder of the year.

Optimism in the Market

Canadians are becoming bullish on home prices again. See chart below. This recent update on lower rates and the Bank of Canada holding off on further hikes will surely stimulate the market. Will the downfall of SVB be the cause of a busy spring market in Canada? Hard to say, but overall sentiment is definitely improving.

As inventory lags, the weather warms and rates see downward pressure again, we might just be through the worst of the housing market woes.

Current Interest Rates

CONVENTIONAL

• 5 year fixed, 30 yr amortization – 5.15%

• 3 year fixed, 30 yr amortization – 5.10%

• 5 year variable, 30 yr amortization – Prime – 0.40% = 6.30%

• 5 year fixed, 25 yr amortization – 4.99%

• 3 year fixed, 25 yr amortization – 4.99%

• 5 year variable, 25 yr amortization – Prime – 0.50% = 6.20%

INSURED

• 5 year fixed, 25 yr amortization – 4.79%

• 3 year fixed, 25 yr amortization – 4.94%

• 5 year variable, 25 yr amortization – Prime – .90% = 5.80%

Fast Facts

• 347,589 – The average mortgage size in Canada is

• 3,000 – That’s the size, in square kilometers, of an iceberg (5x the size of Toronto city) that’s adrift after breaking away from Antarctica.