This is an audio transcript of the FT News Briefing podcast episode: ‘The Fed’s SVB balancing act’

Sonja Hutson
Good morning from the Financial Times. Today is Wednesday, March 15th, and this is your FT News Briefing.

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Silicon Valley Bank is up for grabs and private equity is circling. Bank regulators are in the hot seat for missing red flags. And the SVB turmoil is complicating the Federal Reserve’s fight against inflation.

Colby Smith
What the Fed is grappling with here is not only a fragile financial system, but also extremely hot economy.

Sonja Hutson
Plus, a pact between the UK, Australia and the US could mean lots of investment in those countries’ defence industries. I’m Sonja Hutson, in for Marc Filippino, and here’s the news you need to start your day.

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US regulators in charge of the failed Silicon Valley Bank are looking to sell off some of its loans. And one group that’s interested: private equity. The FT reports that the world’s top private equity firms like Blackstone, Apollo Global Management and KKR are perusing SVB’s $74bn loan book. They’re looking for pieces that might fit into their own credit portfolios.

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The banking turmoil caused by the SVB collapse puts the Federal Reserve in a tough spot. New data shows that US inflation is still stubbornly high. That suggests the central bank will continue to raise interest rates, but the current banking instability may make them more cautious to do so. I’m joined by the FT’s US economics editor, Colby Smith, to find out more. Hi, Colby.

Colby Smith
Hi, Sonja.

Sonja Hutson
OK. So February’s consumer price index, that’s the key inflation indicator, came in at 6 per cent year on year. What does this mean for the Fed?

Colby Smith
So the real critical number was actually, I think, the monthly core increase in consumer prices. So that showed a pretty sizeable jump month on month. Those prices, which strip out volatile items like food and energy, is up half a percentage point in February. Now, that’s just simply too high for the Fed and tells them that underlying inflationary pressures are really not easing in the way they need them to. And all this does is put a little bit more pressure on them to continue raising interest rates going forward.

Sonja Hutson
And as you reported, people are saying the current banking turmoil from the Silicon Valley Bank collapse might make central bankers more cautious about raising rates aggressively. Why is that? What’s the argument there?

Colby Smith
So the argument there is that in times of financial market uncertainty and instability, that the Fed, you know, doesn’t want to contribute to that further. So I think all this debate and speculation about whether the Fed should pause really kind of hit a peak around Sunday evening, early Monday. This is when, you know, it was not yet clear that they had successfully stemmed the fallout from SVB’s implosion. And it wasn’t clear if they were gonna have to do more. But as we saw the day progressed, you know, we didn’t see any bank failures. That was seen as a success amongst regulators. And then when we got the inflation data on Tuesday morning, it really just underscored the fact that what the Fed is grappling with here is not only a fragile financial system, but also extremely hot economy. So that’s why, you know, there’s a lot of uncertainty surrounding this issue.

Sonja Hutson
How much of a bind is this for the Fed? How is it gonna balance these two competing issues?

Colby Smith
Well, that’s the big question. It honestly depends on what happens between now and the meetings next week. Thankfully, things look a little bit more stable. If you look at the share prices of some of the regional banks that got caught up in the turmoil tied to SVB. But there’s still quite a lot of time between now and when Federal Reserve officials actually have to make their final decision. So a lot is gonna depend on what happens over the coming days, on the financial stability front. But we also get, you know, other key data points. We’ll see retail sales later today. And that’s gonna give officials an indication just how strong the US consumer is.

Sonja Hutson
That’s the FT’s US economics editor, Colby Smith. Thanks, Colby.

Colby Smith
Thank you.

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Sonja Hutson
US government prosecutors are now investigating the Silicon Valley bank failure. Meanwhile, bank regulators at the Federal Reserve and California’s state bank watchdog are under the microscope. Critics say they missed warning signs like the rapid jump in deposits at the bank.

Stefania Palma
And that always raises questions around how the bank is essentially managing its internal balance between assets and liabilities.

Sonja Hutson
That’s the FT’s Stefania Palma. She says another red flag was the bank’s growing reliance on a government-linked institution that supports regional lenders.

Stefania Palma
And historically, when you start seeing a lender relying on the system quite heavily, it tends to be right before them running into trouble.

Sonja Hutson
Fingers are also pointing at the 2018 rollback of parts of the Dodd-Frank Act. That was the banking law that Congress passed after the 2008 financial crisis.

Stefania Palma
So in 2018, Congress increased the asset threshold below which banks would be facing less scrutiny from regulators. And essentially what that meant was that a much bigger number of smaller banks in the US were now faced with far more relaxed regulatory oversight. The argument for that at the time was that smaller banks in the US were facing unjustly too onerous a regulatory framework, and that was stifling growth.

Sonja Hutson
And Silicon Valley Bank was among those that qualified for less oversight after part of the Dodd-Frank Act was rolled back.

Stefania Palma
And actually, the chief executive for the bank, Greg Becker, back in 2015, actually testified before the Senate asking lawmakers to increase this asset threshold below which the regulatory burdens would not apply.

Sonja Hutson
Stefania Palma is the FT’s US legal and enforcement correspondent.

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US president Joe Biden was in California this week, not to visit Silicon Valley Bank, he was in San Diego meeting with British prime minister Rishi Sunak and Australian prime minister Anthony Albanese. The three countries make up the Aukus alliance. It’s a security pact formed two years ago to counter China’s influence in the Pacific. This week details were announced of a long-term plan to supply Australia with nuclear-powered submarines. Here’s the FT’s Sylvia Pfeifer.

Sylvia Pfeifer
Australia is going to buy up to five US nuclear-powered submarines, America’s so called Virginia-class boats. This is as a way of bridging a capability gap for when its existing Collins boats come out of service. And while it’s still waiting for the nuclear-powered submarines that it’s going to be building with the UK.

Sonja Hutson
All told, Australia could be buying about 16 submarines and if all goes according to plan, it would mean lots of jobs in shipyards around the world and lots of investment in the US and UK defence industries.

Sylvia Pfeifer
And the sort of big winners I guess from this pact are some of the US shipbuilders. So General Dynamics, they will be getting investment from Australia and also more from the US government to build these additional Virginia-class boats. But then in the very long term, I guess the biggest winners are really in the UK because they’ll be building jointly with Australia. They’ll be building the next generation of nuclear-propelled attack submarines, both for the UK and for Australia, together as a joint programme. The UK builds its own new submarines and Australia builds its own submarines. And the big companies in the UK involved in this, so BAE Systems, Britain’s biggest defence contractor. So they will be building the so-called SSN-Aukus boats for the UK. And then Rolls-Royce, the aero engineer who’ve been building the reactor propulsion systems for UK submarines again for about 60 years or so, they’ll be building the nuclear reactors to power the submarines, both for the UK boats and for the Australian boats.

Sonja Hutson
Sylvia Pfeifer is the FT’s industry correspondent.

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Before we go, if you want more insight into the Silicon Valley Bank collapse and its fallout, join FT journalists in a subscriber-only webinar tomorrow. You’ll hear our own Rob Armstrong, John Thornhill, Elaine Moore and Robin Wigglesworth, alongside Stanford finance professor Anat Admati. That’s this Thursday, March 16th, 4pm, London, 12 noon, New York. We’ve got a link to register in the show notes.

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You can read more on all these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

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