By: Chief Economist Ryan Price & Deputy Chief Economist Sejal Naik 

Virginia REALTORS^® is taking a look at the recent bank failures making headlines across the nation AND breaking down how they could impact the business of REALTORS^®.

What happened?

On Friday, March 10, California regulators shut down Silicon Valley Bank (SVB) and placed it in receivership under the Federal Deposit Insurance Corporation (FDIC). Silicon Valley Bank’s collapse last week marked the second-largest commercial bank failure in the United States. Understandably, this has caused investors and consumers to worry about the state of the U.S. financial system and the possible consequences to an economy already grappling with high inflation levels.

Silicon Valley Bank (SVB), which specialized in banking for venture-backed tech startups, had been negatively affected by the losses that technology stocks have experienced over the past few months. Additionally, the current high interest rate environment had lowered the value of SVB’s bond portfolio which was highly invested in long-term bonds. Given the low momentum in the venture capital market, startups began to withdraw their deposited funds from SVB. Essentially, the bank had unrealized losses at the same time as it was experiencing a decline in its deposits, making a bad situation worse.

Last week, the bank sold its securities at a $2 billion loss and announced that it would sell more securities to create liquidity. These actions caused a panic among the venture capital firms, and they urged their companies to withdraw their money from the bank. All this led to the bank’s stock price plummeting by more than 60%. By Friday morning, trading in SVB shares was halted and the bank was placed in receivership under the FDIC with the certainty that insured depositors would have full access to their funds by the following Monday.

The rest of the banking sector has been experiencing the spillover effects of these events at Silicon Valley Bank. Some regional banks are showing signs of volatility and bank stocks were trading lower due to fears of another banking collapse like the financial crisis of 2007-2008. Case in point—customers of New York-based Signature Bank, which had a balance sheet similar to that of Silicon Valley bank, withdrew more than $10 billion in deposits at the end of last week. State regulators took over Signature Bank with the intention of protecting its depositors and easing the fears of a widespread failure of the U.S. financial system.

Furthermore, there have been repercussions observed in the global financial landscape as well. This week, shares of Swiss-based Credit Suisse fell sharply following some announcements from the bank. Credit Suisse disclosed that they had identified material weaknesses in their financial reporting controls. Additionally, their largest shareholder ruled out any more investments in the firm. While the reasons for the Saudi-based investor to curb further investment were not related to its faith in the bank’s finances, the market, already on edge, took this as a sign of potential trouble. However, Switzerland’s central bank issued a statement saying that Credit Suisse meets the capital and liquidity requirements imposed on systemically important banks and assured that it will provide the bank with liquidity, if necessary.

In response to events since last week and the potential harm to the banking system, the United States Federal Reserve announced the creation of a program that will provide better avenues for liquidity to banks facing a liquidity crunch. It has also indicated its readiness to address any liquidity pressures in the banking system. While Silicon Valley Bank’s fate highlights an overlooked weakness in the regulations, the overall banking system is much stronger and in a good position to endure much severe strains than it was during the financial crisis of the late 2000s.

What does it mean for your business?

While the SVB and Signature bank failures continue to reverberate across the banking industry, the impact on the housing market has been fairly limited thus far. However, it is possible that the lending environment could get tighter as banks look to pad their liquidity amid the uncertainty. Here are a few indirect impacts that could occur in the coming weeks and months.

• Downward pressure on mortgage rates in the short term. Mortgage interest rates decreased in the days following the SVB collapse. The average 30-year fixed mortgage rate as of March 16th, 2023, was 6.6% according to Freddie Mac, which is down from 6.73% the week prior, and the first dip in the rate in the last five weeks. Investor interest in the safety of treasury bonds has ramped up in the days following the SVB collapse; this has pushed yields down, including the 10-year treasury yield, which mortgage rates follow.
• Lingering uncertainty could dampen consumer confidence. If the financial markets continue to be turbulent in the coming weeks, over time, it could begin to cultivate fear for consumers, who would likely curb spending and revaluate big purchases.
• The Federal Reserve could slow rate hikes. The volatility in the banking sector and the broader financial markets could weigh heavily on the Fed as they meet next week to determine whether or not to raise the Federal Funds Rate. Other factors like continued resiliency in the job market, and the slow tapering of inflation, will also be top of mind when they meet. This would typically signal further hikes, but there is growing sentiment that a pause or modest hike could be in the cards until the financial markets are calmer and the risk of contagion is mitigated.

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