SVB doom not seen causing big ripple effect on economy


The sudden meltdown of high-tech lender Silicon Valley Bank is unlikely to cramp the U.S. economy, analysts say, but it could raise the odds of a recession that many believe is inevitable later this year.

The second largest bank failure in U.S. history on Friday sparked worries about spreading financial instability damaging the economy much like what happened when Lehman Brothers collapsed in 2008.

Yet U.S. regulators acted swiftly over the weekend to limit the damage. They seized control of SVB and instituted emergency measures to make lending available to any bank that needs it. By contrast, regulators were slower to act in 2008.

“That should calm fears that might have otherwise sparked additional bank runs,” said lead U.S. analyst John Canavan of Oxford Economics.

Still, the U.S. economy may not get away scot-free.

For one thing, investors and depositors are likely to remain anxious about the health of the financial system. The stocks of several large regional banks remained under pressure on Monday, reflecting lingering angst.

See also: Regional-bank jitters persist despite Fed backstops, with First Republic’s stock halted for trading

Banks both big and small might also be more hesitant to lend, analysts say, which would contribute to slower growth and hiring. Startup companies rely on lending to get going, especially high-tech firms in Silicon Valley.

Even before the SVB crisis, the U.S. economy has dropped down to a slower growth track due to rising interest rates. The Federal Reserve is jacking up interest rates to try to quell the highest inflation in 40 years.

A slight majority of economists think a recession is likely this year due to rising rates. Higher borrowing costs slow the economy by reducing consumer spending and business investment.

The Fed’s actions also exposed the weakness of SVB’s business model. The bank profited handsomely when rates were low and came under intense stress as rates increased.

Opinion: Silicon Valley Bank survived the dot-com crash and the Great Recession, but SVB met its match in Powell’s hawkish Fed

The demise of SVB has led to calls for the Fed to reduce or delay its next rate hike. The central bank had been expected to increase a key short-term rate by one-quarter to one-half a point at its next strategy session on March 21-22.

Were the Fed to slow or halt its rate hikes, the economy could get a small boost temporarily. But that would only be the case if inflation also continued to slow.

The consumer-price index released on Tuesday could lend more clarity to the Fed’s next step.

A slower increase in prices could ease pressure on the Fed to raise rates, but a stronger-than-expected gain could put the Fed in a quandary: Lift rates sharply again and risk more stress on the financial system or let high inflation continue to fester.

Yet economists widely believe the broader financial system is in much better shape than it was during the Global Financial Crisis more than a decade ago. The largest U.S. banks undergo regular stress tests — a regulation SVB was able to escape — and they have more capital on hand.

While some smaller banks could still fail, analysts say, they don’t see a replay of 2007-09. After all, the U.S. has experienced other failures of financial institutions without significant economic fallout, notably Long-Term Capital Management in 1998 and Continental Illinois in 1984.

“While I may be a sucker, I am prepared to believe the hype that the banking sector as a whole is well-capitalized and can weather this storm,” said chief economist Stephen Stanley of Santander Capital Markets.

“I will not be surprised to see a few more victims before the dust settles, but there is no particular reason that this turmoil necessarily has to result in a sharp economic hit,” he added.

U.S. stocks

rose in Monday trades after the Fed, U.S. Treasury and Federal Deposit Insurance Corp. intervened to prop up the financial system.

Stocks had fallen sharply and bond prices surged on Friday after SVP was abruptly shut down.




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