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The uncertainty in the financial system following the demise of Silicon Valley Bank (SVB) has led to continued concern over the stability of banking stocks and fixed income markets.

The Federal Reserve has stepped in to backstop the deposits, creating an implicit guarantee for uninsured depositors at other banks.

Despite these efforts, there are fears that banks will remain under pressure from less stable and more expensive deposits.

Attention is turning to other parts of the financial system, including insurers and bank interest rate swap counterparties carrying larger unrealized mark-to-market losses.

There are two opposing impacts on the economy – lower rates, including lower mortgage rates, could be inflationary and help economic activity, but a need for banks to pay higher interest rates and uncertainty in the system could dampen the economy.

The SVB debacle was caused by at least four things, including not diversifying sufficiently, having too much of one kind of security (long-dated treasuries and mortgage-backed securities), not hedging the risk, and having a large percentage of uninsured deposits.

It is unclear why so many companies kept so much uninsured money at SVB, but it was the 16th largest bank, and everybody did banking there.

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