SVB collapse effects likely limited in US, but risks are growing

Last week’s liquidation of Silvergate Capital and the collapse of Silicon Valley Bank (SVB) have raised questions about the risks of financial instability to the economy. We believe the events should not have significant broader implications for the economy and are not a sign of systemic risks to the banking sector.

What you will learn:

• There is a good deal of uncertainty around that assessment. But the Treasury, Federal Reserve, and FDIC jointly stepped in Sunday night to protect SVB depositors and support other eligible depository institutions as needed. That should calm fears that might have otherwise sparked additional bank runs.
• Still, our base case is that the US economy will undergo a mild recession during the second half of this year. And a large part of the reason for that outlook has been our view that the Federal Reserve will continue to tighten until they break something. This is the first major sign of that happening, and as they continue to increase rates there are likely to be other signs.
• Markets underwent a large flight-to-safety shift late last week, although the SVB collapse was only one factor behind the extent of the allocation adjustments. Provided the joint Treasury, Fed, and FDIC actions stabilize the banks, a portion of that flight to safety is likely to be reversed.