Key takeaways
- The collapse of two regional lenders in the US, Silicon Valley Bank (SVB) and Silvergate Bank, will have important economic and political consequences.
In the near term, political divisions over the root causes of the collapse of SVB prevent a substantial legislative response. President Biden will therefore rely on regulators to make smaller piecemeal changes.
- It is likely that only significant market pressure would incentivise Congressional action. A narrowly divided, highly partisan Congress raises the risk of failed legislative efforts. This is similar to the failure to pass the Troubled Assets Relief Programme on the first attempt in 2008.
- Legislative efforts have already begun in the Senate with the ‘Failed Bank Executives Clawback Act’. But the focus is on the regulators who are set to release reports into SVB’s collapse on 1 May.
- The economic spillovers of the banking turmoil could have implications for the debt ceiling negotiations. A more rapid slowing of the economy may bring forward the so-called x-date, when the US can no longer meet all its obligations.
- This raises the likelihood of a short-term extension to the debt ceiling as the negotiations to deliver a more lasting solution may take longer to complete. This could end up creating multiple x-dates in a short period of time, which could cause rolling volatility in markets.