WASHINGTON, March 12 (Reuters) – The US government intervened on Sunday with a series of emergency measures to boost confidence in the banking system after the collapse of Silicon Valley Bank (SIVB.O) threatened to trigger a broader systemic crisis .
After a dramatic weekend, US regulators said customers of the failed bank will have access to all their deposits from Monday, and regulators set up a new facility to give banks access to emergency funds. The Federal Reserve also made it easier for banks to borrow from it in emergencies.
Regulators were also quick to shut down New York’s Signature Bank, which had come under pressure in recent days.
President Joe Biden said Sunday night the Treasury Secretary and the director of the National Economic Council have been working diligently with banking regulators to address the problems at the two banks.
“The American people and American businesses can have confidence that their bank deposits will be there when they need them,” Biden said in a statement.
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“I am determined to hold those responsible for this mess fully accountable and to continue our efforts to strengthen oversight and regulation of larger banks so that we do not find ourselves in this position again.”
A sense of relief spread across Silicon Valley and global markets as regulators’ announcement came shortly after US futures trading began in Asia. Investors pushed US stock futures on the S&P 500 up 1.2%, while Nasdaq futures rose 1.3%.
“We believe the steps taken by the Fed, Treasury Department and FDIC will significantly break the psychological ‘loop of fate’ in the regional banking sector,” said Karl Schamotta, chief markets strategist at Corpay in Toronto. “But fair or not, the episode will contribute to higher background volatility as investors cautiously watch for other cracks emerging as Fed policy tightening continues.”
The Biden administration’s intervention underscores how a relentless anti-inflation campaign by the Fed and other major central banks is putting pressure on the financial system and global markets.
A mainstay of the startup economy, Silicon Valley Bank (SVB) was a product of decades of easy money, with unique risks that made it particularly vulnerable. But when a run on the bank followed last week, fears quickly spread that other regional banks bore similarities.
With the Fed poised to raise interest rates further, investors said the financial system may not be completely out of the woods just yet. The Fed will hold its next monetary policy meeting on March 21-22.
“What investors need to expect tomorrow and beyond is that we will be addressing a large event risk,” said Michael Purves, CEO of Tallbacken Capital Advisors. “There will still be unanswered questions at other regional banks.”
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The collapse of the SVB — the biggest bank failure since 2008 — sparked concerns about whether small business customers would be able to pay their employees, since the FDIC only protects deposits up to $250,000.
According to the FDIC, about 89% of SVB’s $175 billion in deposits were uninsured at the end of 2022.
According to a joint statement Sunday night by US Treasury Secretary Janet Yellen, Federal Reserve Chair Jerome Powell and Federal Deposit Insurance Corp Chair Martin Gruenberg, all depositors, including those whose funds exceed the maximum federally insured amount, will , restored.
A senior US Treasury Department official said the measures taken on Sunday would protect depositors while supporting the broader banking system, but officials and regulators continued to monitor the health and stability of the financial system.
“The companies will not be saved. Depositors will be protected,” the official said.
The risk would be borne by the Deposit Protection Fund, which has sufficient funds to do so.
“Any time a bank goes bust, especially one with billions of dollars in deposits, it’s an issue that we take seriously,” the official said, noting a potentially “major impact” on the US economy if companies with deposits do at Silicon Valley Bank would not have been able to keep paying their workers.
Deploying the systemic risk exemptions was seen as faster than waiting for a potential buyer, the official said.
“Going forward, we will work with Congress and financial regulators to consider additional actions we might take going forward to strengthen the financial system,” the official said. No further information was given on possible regulatory or legal changes.
STOCK AND BOND HOLDERS “WITHOUT”
Officials said depositors at New York’s Signature Bank (SBNY.O), which was shut down by the New York State Financial Services Commission on Sunday, would also be remunerated with no loss to taxpayers.
Signature, like SVB, had a technology-focused clientele and the securities on its balance sheet had eroded as interest rates rose. In September, almost a quarter of Signature’s deposits came from the cryptocurrency sector, but the bank announced in December that it would reduce its crypto-related deposits by $8 billion.
While all customer deposits are protected, new guidelines passed on Sunday will “wipe out” stock and bondholders in SVB and Signature Bank, a senior US Treasury Department official said.
Coupled with the Federal Reserve’s decision to provide funding to eligible financial institutions and ensure they can meet the needs of all of their depositors, the moves would “restore market confidence,” the official said.
Fed fund futures soared in early trade, implying just a 28 percent chance of a half-point rate hike by the Federal Reserve when it meets next week, compared with around 70 percent before the SVB news last week were released.
The Fed said it would provide additional funding through a new Bank Term Funding Program that would offer custodians loans with maturities of up to one year backed by government bonds and other assets held by those institutions.
In March 2020, as the coronavirus pandemic and lockdowns sparked financial panics, the Federal Reserve announced a series of measures to keep credit flowing by lowering borrowing costs and extending the terms of its direct loans. By the end of the month, utilization of the Fed’s discount window facility shot up to over $50 billion.
Until the middle of last week, before the SVB collapsed, there was no sign of a pick-up in usage as Fed data showed weekly outstanding balances of $4 billion to $5 billion year-to-date.
Reporting by Lananh Nguyen, Paritosh Bansal, Tatiana Bautzer, Nupur Anand, Ira Iosebashvili and Dan Burns in New York, and Pete Schroeder, Jason Lange, Sarah N. Lynch, Rami Ayyub, David Morgan and Andrea Shalal in Washington, Kanjyik Ghosh and Akanksha Khushi in Bengaluru and Andrew MacAskill, William Schomberg, Amy-Jo Crowley and Pablo Mayo in London; writing by Megan Davies, Alexander Smith, Leslie Adler and Simon Lewis; Edited by Jamie Freed, Deepa Babington, Heather Timmons, Diane Craft and Leslie Adler
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