After SVB failure, US Acts to Shore Up Confidence in Banking System

photo: The Guardian

On Sunday, the U.S. government took emergency measures to restore confidence in the banking system after the collapse of Silicon Valley Bank (SIVB.O) threatened to cause a wider systemic crisis. In response to the situation, regulators announced that the bank's customers would have full access to their deposits beginning on Monday, and a new facility was established to provide emergency funding to banks. Additionally, the Federal Reserve implemented measures to make it easier for banks to borrow from them during times of crisis. These actions were taken in the aftermath of a tumultuous weekend.

In addition, regulators acted quickly to shut down Signature Bank in New York, which had been facing increasing pressure in the past few days.

On Sunday evening, President Joe Biden released a statement indicating that the Treasury Secretary and the Director of the National Economic Council had worked closely with banking regulators to address the issues at both banks. He reassured the American people and businesses that they can trust that their deposits will be secure when they need them.

"I am fully dedicated to ensuring that those responsible for this situation are held accountable, and we will continue our efforts to strengthen oversight and regulation of larger banks to prevent a similar occurrence in the future."

Following the announcement by regulators, a feeling of relief was felt throughout Silicon Valley and global markets. The announcement came just as U.S. futures began trading in Asia. As a result, investors sent U.S. S&P 500 stock futures up by 1.2%, while Nasdaq futures rose by 1.3%.

Karl Schamotta, the chief market strategist at Corpay in Toronto, commented, "We believe that the measures taken by the Fed, Treasury, and FDIC will effectively put an end to the psychological 'doom loop' that has been affecting the regional banking sector. However, whether it is fair or not, this incident will contribute to a higher level of underlying volatility, with investors keeping a close eye on other potential cracks that may emerge as the Fed continues to tighten its policies."

The intervention by the Biden administration highlights how the ongoing efforts by the Fed and other major central banks to combat inflation are putting pressure on the financial system and global markets.

photo: timeofisrael.com

Silicon Valley Bank (SVB), a critical player in the startup economy, emerged during a period of cheap money that spanned several decades, making it particularly vulnerable to unique risks. As a bank run unfolded last week, concerns about the similarities shared by other regional banks quickly surfaced.

Investors warned that with the Federal Reserve expected to continue raising interest rates, the financial system may not be entirely out of danger. The Fed is scheduled to hold its next policy meeting on March 21-22.

Michael Purves, the CEO of Tallbacken Capital Advisors, stated, "Investors should expect a significant amount of event risk moving forward, not just for tomorrow but beyond. There will still be lingering concerns about other regional banks."

DEPOSITORS SAFEGUARDED

Following the collapse of SVB, which was the largest bank failure since 2008, concerns were raised about whether small business clients would be able to pay their staff, given that the FDIC only insures deposits of up to $250,000.

According to the FDIC, as of the end of 2022, 89% of SVB's $175 billion in deposits were uninsured.

In a joint statement issued on Sunday evening by U.S. Treasury Secretary Janet Yellen, Federal Reserve Chair Jerome Powell, and Federal Deposit Insurance Corp Chair Martin Gruenberg, it was announced that all depositors, including those whose funds exceed the maximum government-insured level, would be fully reimbursed.

According to a senior U.S. Treasury official, the measures taken on Sunday were intended to safeguard depositors while also providing extra assistance to the wider banking system. However, officials and regulators are still monitoring the financial system's health and stability.

"The objective is to safeguard depositors, not bail out firms," the official stated.

The Deposit Insurance Fund, which has adequate funds to do so, would shoulder the risk.

The official stated that any bank failure, particularly one with billions of dollars in deposits, is a serious matter that could have significant repercussions for the U.S. economy if companies with deposits in Silicon Valley Bank were unable to pay their employees.

The decision to provide systemic risk exceptions was made because it was considered to be a faster solution than waiting for a potential buyer, according to the official.

The official also said, "In the future, we will collaborate with Congress and financial regulators to explore additional measures to reinforce the financial system." However, no specific details were provided regarding potential regulatory or legislative changes.

EQUITY AND BONDHOLDERS 'WIPED OUT'

According to officials, depositors of Signature Bank in New York (SBNY.O), which was shut down by the New York state financial regulator on Sunday, will also be fully compensated without any loss to the taxpayer. Similar to SVB, Signature had a customer base concentrated in the tech industry, and the securities on its balance sheet had declined as interest rates increased. Almost 25% of Signature's deposits were from the cryptocurrency sector as of September, but the bank announced in December that it would decrease its crypto-related deposits by $8 billion. As a result, equity and bondholders were wiped out.

A senior U.S. Treasury official said that new policies adopted on Sunday would "wipe out" equity and bondholders in both SVB and Signature Bank, while all customer deposits would be protected. The Federal Reserve also made funds available to eligible financial institutions to ensure they could meet the needs of all their depositors, which would help "restore market confidence," the official said. The news caused Fed fund futures to surge in early trading, implying only a 28% chance of a half-point rate hike by the Federal Reserve at its upcoming meeting, compared to around 70% before the SVB news broke last week.

Reuters Graphics

The Federal Reserve has announced a new Bank Term Funding Program that will provide loans up to one year to depository institutions, backed by Treasuries and other assets held by these institutions. This move is intended to ensure that financial institutions can meet the needs of their depositors.

In March 2020, in response to the financial panic caused by the coronavirus pandemic and lockdowns, the Federal Reserve took measures to keep credit flowing by reducing borrowing costs and extending the terms of its direct loans. By the end of that month, the use of the Fed's discount window facility had risen to over $50 billion.

Before the collapse of SVB last week, there were no indications of increased usage, with Fed data showing weekly outstanding balances of $4 billion to $5 billion since the start of the year.

Reuters Graphics

Read More: Following SVB, The US Banking Regulator Closes Signature Bank