By Yasin Ebrahim

Investing.com — The Federal Reserve’s fingerprints are all over the dramatic collapse of Silicon Valley Bank, with some calling for the central bank to put further rate hikes on hold as debate erupts over whether a possible banking crisis looming.

“Definitely the Fed should pause [rate hikes]Will Rhind, CEO and founder of GraniteShares, told Investing.com’s Yasin Ebrahim in an interview Friday.

Following news that SVB Financial Group (NASDAQ:) had filed for bankruptcy, investors reined in their bets on a 50 basis point rate hike in March to 40% from about 80% earlier this week, according to Investing.com’s Fed Rate Monitor tool.

“There was always going to be a consequence of raising rates that fast and that high, and people didn’t necessarily know what the consequence would be. “The Silicon Valley Bank is the first thing that broke, and it’s a direct result of rising interest rates,” Rhind added.

SVB – A victim of the Fed’s aggressive rate hikes?

The last days of SVB will go down in history as one of the fastest bank runs ever. In just 24 hours, Silicon Valley Bank saw a rapid deposit outflow of $42 billion on Thursday and quickly found itself in a game of catch-up that it ultimately lost after failing to sell assets fast enough to cover withdrawals.

But the bank’s problems lasted much longer than just a few days. It was many months in the making, dating back to the early days of the coronavirus pandemic, when technology was in vogue and companies were raising huge sums of money from venture capitalists.

With its deep roots in the technology industry, SVB seemed like the obvious partner of choice for many of these money-rich upstarts and technology companies, plowing billions into the bank’s coffers and boosting its deposits.

At a time when plenty of liquidity was sloshing into the economy, SVB, driven by ultra-low interest rates and fiscal stimulus, struggled to lend it all. The California-based lender instead decided to invest most of its deposits in long-dated US Treasury bonds that would allow it to earn a return, albeit only a few percentage points.

This worked well when interest rates were low, as the price of government bonds, which traded inversely to interest rates, remained relatively stable on the balance sheet, but that all changed. Realizing that inflation was not transient, the Fed embarked on the fastest rate hike in more than four decades.

SVB now had a real problem: the price of its bonds, which trade inversely to interest rates, fell sharply and before long it was sitting on a ton of low-interest assets that were under water.

The bank had huge unrealized losses on securities that needed to be shifted – and fast. The lender’s tech-heavy clients were already pulling out of their deposits as rising costs and rates began to bite.

The lender’s solution was to sell its low-yielding long-term bonds and buy short-dated bonds that now had much more attractive yields amid a determined Fed that wanted to push interest rates to restrictive levels as quickly as possible.

The bank disclosed this remedy in a letter to shareholders, estimating a $1.8 billion loss on the sale of its bond portfolio, and also detailed plans to raise approximately $2.25 billion in capital to strengthen its finances. strengthen.

But the bulk of investors and customers were not willing to wait. By ignoring SVB CEO Greg Becker’s call to “keep calm,” clients accelerated the pace of withdrawals, leaving the lender staring into the abyss of insolvency.

Political pressure beckons for Powell?

The debate for investors now is whether this is a one-bank issue or something systemic. There are indications that there may be more SVBs.

Clients Bancorp (NYSE:), Bank of the First Republic (NYSE:) and New York Community Bancorp (NYSE:) were among a list of 10 banks outlined by Morningstar that are holding unrealized losses and facing a major hole in their finances if they are forced, as the SVB was, to sell.

The threat that something systemic could be brewing in the banking system, causing many regional banks to fail, will not be well received in Washington. And the likely response could come in the form of intense political pressure on Federal Reserve Chairman Jerome Powell to halt rate hikes.

“If the response to interest rate hikes causes regional banks to fail, then that will be very difficult politically because many politicians will pressure the Fed and say that it is unacceptable that you have to stop,” Rhind said.

While market participants have reversed course with a 50 basis point rate hike, they don’t believe the Fed will throw in the towel just yet and are forecasting another 25 basis point rate hike in March, even if next week’s inflation report heats up. .

“Even if inflation surprises positively next week, we think the Fed will eventually conclude that risks have become more two-sided, and that 25 basis point steps are the most prudent path,” Jefferies said.

Still as the debate heats up over whether we are staring down the barrel of another potential banking crisis, there is some consensus that the Fed’s heavy hand played a role in SVB’s failure, resulting in the largest bank failure since 2008 worldwide. financial crisis.

“While this episode is not indicative of a banking crisis, it is indicative of the financial rifts and unintended consequences of the fastest rate hikes since the 1980s,” Wei Li, Global Chief Investment Strategist at BlackRock (NYSE: ), said in a post. on Friday.