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Rising Interest Rates Putting Pressure on the Global Financial System

In recent months, the Federal Reserve has been increasing the federal funds rate at a rapid clip to curb inflation. The Federal Reserve has raised the federal funds rate by 25bps to 4.75%-5% in its March 2023 meeting, matching the February increase. This brings significant impact on the financial system as high interest rate reduces borrowing from customers and increases the required rate of return for depositors. As a direct consequence of the increase in rates, prices of existing or vintage bonds decline significantly. This has put pressure on banks, which led to the recent collapse of Silicon Valley Bank.

Silicon Valley Bank was founded in 1983 and was the 16th largest U.S. bank before its collapse. The bank specialized in financing and banking for venture capital-backed startup companies. The bank provided financing for about half of all U.S. venture-backed technology and healthcare companies. The bank was a preferred bank for the tech sector because they supported startup companies that not all banks would accept due to higher risks.

Silicon Valley Bank for many years enjoyed low interest rates as billions poured into the bank via tech venture capital businesses. Startups often deposit their money in the bank and also borrow money from the bank at attractive rates, allowing the bank to make significant long term investments into US treasury bonds. However when interest rates increased at a rapid pace, depositors started demanding higher returns, and the bank had to sell most of its bond portfolio at a huge loss. When the news was made public, many depositors and investors were spooked, triggering a classic bank run. It took about 36 hours for the bank to collapse.

On March 26, 2023, the Federal Deposit Insurance Corporation (FDIC) announced First Citizens Bank will purchase Silicon Valley Bank and assume the majority of its deposits and loans. As of March 10, Silicon Valley Bank reported nearly USD167 billion in total assets and USD199 billion in deposits. First Citizens Bank will purchase about USD72 billion in assets at a discounted rate of USD16.5 billion. FDIC will remain in control of nearly USD90 billion in assets and securities in its receivership. All 17 of Silicon Valley Bank’s branches will operate under Silicon Valley Bank, a division of First Citizens Bank.

The collapse of Silicon Valley Bank created a shockwave that rippled across the globe, revealing weaknesses in both regional and major financial institutions. Other banks such as Signature Bank and Credit Suisse were also facing insolvency issues similar to the case of Silicon Valley Bank. In recent news, Credit Suisse was a target for a buyout by UBS for USD3.25 billion and also New York Community Bank agreed to buy a large portion of Signature Bank in a USD2.7 billion deal.

On March 14, Moody’s Investor Service put six regional banks on review for credit rating downgrades, including Comerica Bank, First Republic Bank, Intrust Financial, UMB Financial, Western Alliance Bancorporation and Zions Corp. The reasons for these ratings include high unrealized losses and large amounts of deposits not covered by FDIC.

Many investors are now cautious of investing in Financial Institutions, as rate hikes are expected to increase further and will remain elevated, putting tremendous pressure on the financial system globally.

From this, we are expecting a strong crunch in lending activities from banks, with the continued hike of interest rates globally. This presents an opportunity for Kairos Capital Group to launch similar alternative financing products. We are continuously improving our offerings and remain competitive in our curated products for high-net-worth and family office clients.

In the pipeline, we are expecting to launch a Leverage REIT fund and a Private Credit fund to capitalize on the opportunities at hand. Please stay tuned to our social feed as we embark on this new journey.

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