The financial news story of the week is the failure of Silicon Valley Bank, via a depression-era ”run on the bank.” You can read a good summary from the CBC here: https://www.cbc.ca/news/business/silicon-valley-bank-us-uk-1.6776860
This was not a small bank; while hardly Wells Fargo or Citibank, it was one of the 20 largest in the USA with >$200B in assets, and ended up the 2nd largest bank failure in US history. It wasn’t a household name here, but Silicon Valley Bank catered to influential players like technology companies and the wine industry. And immediately afterward, Signature Bank was closed by regulators; smaller but still >$100B in assets.
I think it’s important to note these banks are NOT typical lenders, and major Canadian lenders aren’t going broke tomorrow. Signature Bank specialized in the crypto industry; you know my views on the difficulty and volatility of that asset. Silicon Valley bank had a niche in venture capital, which has fallen almost as hard as crypto with rising rates.
OK, some smaller US banks failed: so what? Does this affect the Canadian real estate industry? It might... the Globe summarizes it nicely:
- As recently as last week, markets were expecting the U.S. central bank to increase its benchmark interest rate by another percentage point in the coming months, and to hold off rate cuts until 2024. But by Monday, markets were doubting that the Fed will raise rates at all at its next meeting on March 22, and pricing in cuts by this summer.
We can see it in the data quite clearly. The drop this week in Canadian bonds is one of the sharpest in years, and investor sentiment seems to have changed significantly. Investors can be wrong, and the Bank of Canada doesn’t have to act because of a US bank failure; but a rate cut is looking more likely than it did a week ago.
Summary
Two significant lenders failed in the US last week, which may lead to reversals in interest rate policy across the world, including Canada.
