January 25th I wrote about the growing lending activity taking place in the Fed’s discount window. I have noticed that, despite popular belief, not all borrowing in the discount window is due to emergencies. But I also added that with interest rates rising rapidly and the money supply shrinking for the first time in decades, and perhaps the fastest ever, the onset of a liquidity crisis is nevertheless very likely.
I wrote then:
Nothing is final yet. In about 18 months, information about firms that have used the Fed’s discount window since March 2022 will become public. If these funding requests are simply related to the ongoing effects of the 2022 economic maelstrom, we will know about it at that time. If something worse is brewing, it will be much sooner.
It is not yet known whether Silicon Valley Bank (SVB) was the firm or one of several that borrowed in the discount window. However, there are a few things we do know. First, the collapse of SVB was the second largest bank failure in US history. Secondly, the bank desperately tried to sell assets and lost several billion dollars on this. Third, as of the end of December SBV holds 57 percent of its total assets in investments while the average among 74 peers was about 42 percent. Of these investments, $108 billion was in US Treasury and agency securities, an asset class that 2022 was the worst year on record.
In November 2021, the stock reached an all-time high of $755 per share and then joined the rest of the market during a price decline in 2022. March was brutal. After drifting in a range of roughly $250 to $350 since the start of 2023, the share price fell from $283 on Monday, March 6 to $267 on March 8 and 9 before crashing to $106.04 on Thursday, March 9. until 9 am today, March 10, trading was stopped.
Silicon Valley Bank (2020–present)
Federal Depository Insurance Company (FDIC) documents indicate that US banks over $600 billion in unrealized losses last year, much of which was caused by a sharp drop in bond prices amid aggressive interest rate hikes by the Fed. In addition to holding $108 billion in treasury bills During the worst year in history for such securities, SVB’s ledgers include $74 billion in loans, some of which were no doubt made to local tech companies. Tech companies have also been under pressure lately to cut costs.
Fed Discount Window Activity vs. Fed Effective Funds Rate (2020-present)
Since the end of 2019, Federal Reserve policy has pumped trillions of dollars into the monetary base. As kids today say,money printer [went] br“. The reversal of this process and the tightening of financial conditions led to a negative annual growth of M2 for the first time on record. Whereas restrictive policies generally affected the profitability of interest-sensitive firms until recently, they now threaten their survival for some.
KBW bank index (white) vs. Annual growth of monetary aggregates M1 (orange) and M2 (blue) (from 2022 to present)
The cost of loans taken when rates were low has fallen and savers are expecting higher rates. Financial institutions and firms that have borrowed from them for two decades at lower-than-usual rates are already feeling the effects of simple normalization. Combination of SVB development on top Yesterday’s disclosure of Silvergate Capital Corp. that he will stop working amid the collapse of the cryptocurrency industry could not have happened at a worse time. The Fed’s marginal interest rate estimates are approaching 6 percent amid continued inflation in the services sector and employment data too strong for a comfortable living. If history and market implied interest rates are the benchmark, it won’t take much more effort in the financial sector for the Fed to start easing rates again.
We won’t know for another twelve or fourteen months if the Silicon Valley Bank (or any other bank thrown overboard today) was the one who borrowed in the Fed’s discount window. But it is becoming increasingly likely that whatever the firm(s), the driving force was a pressing need.