As the Street debates the ramification of the SVB Financial Group (NASDAQ:SIVB)-owned Silicon Valley Bank’s collapse and the government’s rescue, one analyst reasoned that the solution for the problem could result in an incomplete resolution.
What Happened: The Fed stepping in to prevent a bank run could be a restart of quantitative easing, setting the stage for much larger problems down the road, said Genevieve Roch-Decter, founder of financial media company Grit Capital.
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The former money manager noted that SVB’s problem had to do with its bond portfolio locked in at low yields, forcing the bank to sell the bonds at huge losses to meet the $42 billion in withdrawal requests in one day.
The government had to intervene to avert hundreds of bank runs and potentially the collapse of some of them, she said.
What The Fed Did: The Fed opened swap lines to prevent the occurrence of the same problem with other banks, Roch-Decter said, adding that the central bank stepped in to replace the Federal Deposit Insurance Corporation.
“And instead of insuring just $250k per account, they’re now insuring every single deposit,” the analyst said. The deposits, she said, will collectively be in the range of $19 trillion.
If withdrawals accelerate, banks sitting with huge unrealized losses from assets that have decreased in value to the rising rate environment can afford to wait out the duration of the bonds, the analyst said. These banks can then redeem the bonds at par value at the end of the duration, she added.
Roch-Decter noted that Fed’s intervention means banks can swap their troubled assets for par value and they can pledge their assets in return for loans equivalent to the original value of the assets.
The current inflationary pressure that has forced the Fed to aggressively raise interest rates is due to the Fed’s quantitative easing in the wake of the COVID-19 pandemic.
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