Banking regulators on Sunday rolled out a plan to backstop depositors with money Silicon Valley BankAn important step in addressing a looming systemic panic triggered by the collapse of a tech-centric institution.
Depositor in failed SVB and both signature bank in New York, closed on sunday It will have full access to its deposits as part of a series of steps that were approved by authorities over the weekend, over fears of a similar systemic contagion. Signature has been a popular funding source for cryptocurrency companies.
Those who have money in the bank will have full access from Monday.
The Treasury Department designated both SVB and Signature as systemic risks, authorizing it to open both institutions in a way that “fully protects all depositors.” The FDIC’s Deposit Insurance Fund would be used to cover depositors, many of whom were uninsured because of the $250,000 cap on guaranteed deposits.
Along with that move, the Federal Reserve also said it was creating a new bank term funding program aimed at protecting institutions affected by the market volatility of the SVB failure.
A joint statement from the various regulators involved said there would be no bailout and no taxpayer cost associated with any new scheme. Shareholders and some unsecured creditors will not be protected and will lose all their investments.
“Today we are taking decisive action to protect the American economy by strengthening public confidence in our banking system,” Federal Reserve Chairman Jerome Powell, Treasury Secretary Janet Yellen and FDIC Chairman Martin Gruenberg said in a joint statement.
The Fed facility will offer loans of up to one year to banks, savings associations, credit unions and other institutions. Those taking advantage of the facility will be asked to pledge high-quality collateral such as Treasuries, agency loans and mortgage-backed securities.
“This action will strengthen the banking system’s ability to ensure the safety of deposits and the ongoing provision of money and credit to the economy,” the Fed said in a statement. “The Federal Reserve stands ready to relieve any liquidity pressures that may arise.”
The Treasury Department is providing up to $25 billion from its Exchange Stabilization Fund as a backstop for any potential losses from the financing program. A senior Fed official said the Treasury program would not be needed and would exist only as a security.
The same official expressed confidence that confidence in the financial system would be boosted by various steps to provide money guarantees and liquidity considered essential during the financial crisis.
Along with the facility, the Fed said it would lower terms on its discount window, which will use similar terms to the BTFP. However, the new facility offers more favorable terms, with a longer loan tenure of one year versus 90 days. Also, the securities will be valued at par value instead of the market value as assessed at the discount window.
The haircut, or principal reduction, issue is significant because of the estimated unrealized losses of about $600 billion held by institutions in near-to-maturity Treasuries and mortgage-backed securities.
“This should be enough to prevent any contagion from spreading and taking down more banks, which can happen in the blink of an eye in the digital age,” Paul Ashworth, chief North America economist at Capital Economics, said in a client note. ” “But contagion has always been more about irrational fear, so we would stress that there is no guarantee that this will work.”
Market reacted positively The Dow Jones Industrial Average braced for growth with futures jumping more than 300 points in early trade. Cryptocurrency prices also moved strongly, with bitcoin rising by over 7%.
The rescue plans evoked memories of the financial crisis, but Yellen said Sunday morning that there would be no SVB bailout.
“We’re not going to do that again. But we are concerned about depositors and are focused on trying to serve their needs,” Yellen said on CBS’ “Face the Nation.”
President Joe Biden praised Sunday’s initiative but indicated the crisis would have consequences.
“I am committed to holding those responsible for this mess fully accountable and to continuing my efforts to strengthen oversight and regulation of big banks so that we are not in this situation again,” Biden said.
The failure of SVB was the nation’s largest collapse of a financial institution since the 2008 takeover of Washington Mutual.
The dramatic moves come just days after SVB, a major funding center for tech companies, reported it was struggling, starting a run on bank deposits.
Officials had spent the weekend looking for a larger institution to buy SVB, but were unsuccessful. PNC was an interested buyer but backed out, A source told CNBC’s Sarah Essen,
A senior Treasury official said Sunday evening that a sale is still possible for the Silicon Valley bank. Sunday’s initiative was taken to head off potential problems ahead.
The scenario pointed to the September 15, 2008 collapse of investment banking giant Lehman Brothers, which found itself insolvent and looking for a buyer. The government also failed in that case, which followed a weekend tussle that triggered the worst of the global financial crisis.