Our Live Presentations this month. An update on UK and world economics the principal theme. The focus on interest rates of great interest. The disruption to financial markets and the banking sector was brought into focus by the collapse of Silicon Valley Bank.
A lot of interest in the demise of SVB. The rise in interest rates and the collapse of bond prices had already created problems for pension funds with LDI exposure in the U.K. Rate hikes by the Fed and the rise in bond yields created fatal challenges to the balance sheet of SVB in the U.S.A. There have been many warnings about the problems to follow the eventual "Escape From Planet ZIRP". Bonds not gilt edged but razor edged. They really are the peaky blinders of investment.
In June 2013 Andy Haldane Chief economist at the Bank of England warned : “Let’s be clear, we have intentionally blown the biggest government bond bubble in history”. Andy Haldane was then the director of financial responsibility at the Bank of England.
In November 2015 we wrote "Over the medium term, we expect bond yields (after Fisher) to reflect a hedge against inflation plus a real risk return. Hence we consider the normalized yield on ten year gilts to be between 4% to 4.5% if the plausible inflation target is 2%. There is a real risk of capital collapse as bond yields rise and capital prices fall as yields return to normalized values." Warnings From Planet ZIRP November 2015"
The SVB Balance Sheet Too Heavy for the Flight ...
A balance sheet too heavy for the flight, SVB was ill equipped for the transition. Deposits had increased from $49 billion dollars in 2018, to $189 billion dollars by 2021. "Hot money" of course, two thirds of the deposits were non interest bearing demand deposits. Over 90% were above $250,000 and not insured under FDIC rules. In 2022 deposits fell by $16 billion as investors were lured away by the prospect of higher yields. It was a harbinger of problems to follow for the bank in 2023.
Much attention has been focused on the asset disposition on the balance sheet. Assets under management had increased from $57 billion in 2018 to $212 billion by the end of 2022. In 2022 almost $40 billion dollars were held in cash ($14 billion) and Assets for Sale ($26 billion) including $16 billion held in U.S. Treasuries. Total Assets For Sale were marked to market with a $2.5 billion impairment.
The Net Asset Value or Total Equity in the bank was $16 billion. Unchanged from the year before, the balance sheet had absorbed the hit from deposit withdrawals and the asset write down.
More ominous was the position on Assets Held to Maturity. Over $90 billion by the end of 2022, 90% of the assets were held in the alphabet soup of mortgage debt. MBS, CMOs and CMBS. Mortgage Backed Securities, Collateralized Mortgage Obligations and Colllateralized Mortgaged Backed Securities featured. Illiquid and vulnerable to rising rates, echoes of 2008 would create concerns for some. The balance sheet note of a $15 billion loss should the HTM assets be marked to market, extinguishing Total Common Equity, would cause depositors to head for the exit.
The SVB 10k Annual Return was filed on the 24th February ...
The SVB 10k Annual Return was filed on the 24th February. At the beginning of March, Moody's reportedly informed SVB Financial, the bank's holding company, it was facing a potential downgrade of its credit rating because of its unrealized losses.
On March 8, 2023, SVB announced it had sold over $21 billion of investments, borrowed $15 billion, and would hold an emergency sale of its stock to raise an additional $2.25 billion. investors were reluctant. The markets were unconvinced. By the close of business on March 9th, customers had withdrawn $42 billion dollars. A further $100 billion was up for withdrawal the following day. The Bank had run out of cash and options.
SVB was placed into the FDIC receivership. The Bank of Planet ZIRP could no longer escape. Perhaps It was never designed to make it.
Our Latest Case Study : Silicon Valley Bank : The Bank from Planet ZIRP ...
Don't Miss Our case study Silicon Valley Bank : The Bank from Planet ZIRP . It will be published for an Easter read. Charts, spreadsheets and 20,000 word text will provide a full background. Don't miss that!
Sign Up Here ... Silicon Valley Bank
Want to know what's next for interest rates ? Don't listen to the Governor of the Bank of England ...
Andrew Bailey was speaking at an event in London this week, hosted by Brunswick, the public relations firm. What next for monetary policy? What was the Governor saying? The press reaction was mixed, confused and slightly controversial.
According to Mehreen Khan in the Times the Bank of England hinted at more rate rises to tame inflation.
According to Larry Elliott in the Guardian, the Bank of England boss signalled that interest rates may heave peaked after ten successive increases in the official cost of borrowing since December 2021.
In the Telegraph, "Andrew Bailey down played talk of a sharp rise in interest rates" according to Szu Ping Chan.
For Sky News "Bailey suggested interest rates may rise less than previously thought signalling there is no urgent need for hikes" and in the FT "Andrew Bailey signals no pressing need for more UK interest rate rises."
Some were even led to think the Governor was saying interest rates may have peaked.
So what did the Governor actually say? Bailey may have hinted that more interest rate rises may be "appropriate" to contain inflation but made it clear that no decisions had yet been made ahead of the next meeting of the MPC.
He said the monetary policy committee would wait for an extra round of data on inflation and the labour market before making a judgment on raising rates again at the meeting on March 23rd.
"I would caution against suggesting either that we are done with increasing Bank rate or that we will inevitably need to do more. Some further increase in Bank rate may turn out to be appropriate but nothing is decided. The incoming data will add to the overall picture of the economy and the outlook for inflation and that will inform our policy decisions."
However the governor did warn the Bank was alert to the risk of repeating the mistakes of the 1970s and would not hesitate to raise rates further should inflationary pressures embed.
So what's next for monetary policy? Rates may go up, they may go down, they may increase dramatically or not as dramatically as some expect.
Obfuscation, the action of making something obscure, unclear, or unintelligible, is an art form of the central banker.
Alan Greenspan 13th Chairman of the Federal Reserve would say, "If I appear to be particularly clear, then you have clearly misunderstood what I have said".
Bailey may have been slow to pick up the lingo, but he appears to be in the swing of it now. Want to know what's next for interest rates ? Don't listen to the Governor of the Bank of England. Read our Friday Forward Guidance in the Saturday Economist instead. JKA
The Saturday Economist
John Ashcroft publishes the Saturday Economist. Join the mailing list for updates on the UK and World Economy.
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