when one Bank collapses, the panicked question is often “Who’s next?” Other financial institutions may be exposed because of connections to the collapsed entity, because they use similar business models, or simply because investor sentiment has soured. Depositors face losses if their money is too large to be covered by deposit-insurance schemes.
they were fine concerns provoked by Death of Silicon Valley Bank ,svb), the US’s 16th largest lender after a failed attempt to raise capital and a run on his deposit on 10 March. Rumors spread on social media over the weekend about possible problems at some other regional lenders. It was easy for nervous corporate treasurers to decide to move their deposits to the largest banks, just in case. But on March 12, a joint response by the US Treasury, the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) helped allay concerns about depositors by revealing yet another banking crash.
There were two aspects to his action. Earlier the depositors had to be fully repaid svb and Signature Bank, a New York-based lender with $110 billion in assets that was shut down by state officials on Sunday. Officials said the signing was closed to serve consumers and the financial system “in light of market events” and to “cooperate closely with other state and federal regulators”. In any case, the taxpayers will not have to pay the bill. Equity holders and many bondholders in both banks would be wiped out; FDICThe U.S.’s deposit-insurance fund, into which all US banks pay into, would bear any residual costs. Depositors in both the banks will have full access to their money on Monday morning.
The second was to set up a new lending facility at the Fed, called the Bank Term Funding Program. It will allow banks to pledge Treasuries, mortgage-backed securities (MBSs) and other eligible assets as collateral. Banks will be eligible for loans that are equal to the face value of the securities pledged by them. The borrowing rate on that cash would be fixed at the “one-year overnight index swap”, the market interest rate, plus 0.1%. These are generous terms. treasury and MBSS often trade below their par value, especially when interest rates rise. The Fed closely monitors the funds rate offered to banks; There is no additional 0.1% penalty for accessing the feature.
The actions taken by the Treasury and the Fed raise many questions. the first is will anyone buy svb or signature. A senior Treasury official says things moved at a necessarily high pace over the weekend, as it was important to reassure depositors on Monday morning. to bid for another bank svb Extensive work will be required, which is difficult to complete in a weekend. a deal for svb Or the signing could come in the coming days or weeks. (on March 13 hsbcEurope’s biggest bank said it would buy its British branch svb for £1, or $1.21.)
More importantly, people will also ask whether these actions are tantamount to a government bailout. Answering this is not straightforward. Officials could repay depositors in full by liquidating bond- and equity-holders and potentially levying fees on banks. This shows that the misdeeds of other banks may have to pay the price, rather than the taxpayers. svb and signature. Yet even though it closed two lenders, it is clear that the state’s role in backstopping the banking system has expanded, given that banks can exchange high-quality assets for cash.
The Critical Role of Central Banks, wrote Walter Bagehot, former editor of economist, In 1873, the mandate for the banking system is to act as the lender of last resort – and to do so lend freely against good collateral, at a penalty rate. This allows a central bank to stabilize the financial system, preventing the demise of an illiquid lender to otherwise solvent institutions. The Fed already has a lending facility called the discount window, in which banks can borrow against their collateral at a reasonable price. The new program not only protects banks from liquidity issues, but also insulates them from interest rate risk. maybe he would have survived svb, which was loaded at that risk. but it can encourage even more Negligence in others.
editor’s Note: This piece has been updated to include HSBC’s Purchase We have also clarified the nature of loans that banks are eligible to avail.