“The Federal Deposit Insurance Corporation took control of the bank’s assets on Friday. The failure raised concerns that other banks could face problems, too.”
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In light of the news this morning that Silicon Valley Bank (SVB) has been closed by the California Department of Financial Protection, which appointed the Federal Deposit Insurance Corporation as SVB’s receiver, it’s fair to ask if this is the beginning of a trend among regional banks or an isolated incident. SVB, while unique in the banking industry, since it would lend against illiquid (pre-IPO) securities, mainly issued by ventured-backed companies, faced challenges in a rising interest rate environment that are not unique and which, many similarly situated regional banks, are still facing.
As the Federal Reserve considers whether to raise interest rates by 0.25% or 0.5%, in order to combat inflation, a key factor in their analysis will be the impact these interest rate hikes have on regional banks and their portfolios. Regional banks, unlike their Fortune 100, multi-national counterparts, derive their value from vast portfolios of bonds, which are very sensitive to interest rate hikes (as interest rates rise, the value of these bonds fall). For instance, the S&P Regional Banks Select Industry Index is down 3.69% today, 19.92% month-to-date, and 13.02% year-to-date.
Therefore, in the coming days, it will be crucial to watch both the Federal Reserve’s Federal Open Market Committee meeting on March 21-22 and whether SVB’s collapse signals a contagion among the regional bank sector. SVB’s closure is the biggest bank collapse since the financial crisis and many start-up/early-stage companies will be very interested to see if it is the last or the first of many.
Article By Aaron H. Jacoby and Justin A. Goldberg of ArentFox Schiff LLP
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