In the wake of the collapse of Silicon Valley Bank (SVB), US regulators put together an emergency package of support for financial institutions. The moves were designed to prevent any further failures by easing fears of large losses among uninsured big depositors, even as a debate continued over how widespread the problems were. Other measures were aimed at easing strains on bank balance sheets caused by the US Federal Reserve’s rapid interest-rate increases over the past year.
1. What did the regulators do?
The Treasury Department, the Fed and Federal Deposit Insurance Corp. jointly announced efforts to boost confidence in the banking system:
• The FDIC said it will wind up SVB’s accounts in a way that that “fully protects all depositors,” a promise it also extended to depositors of Signature Bank, which was closed by New York regulators on Sunday. More than 93% of domestic deposits at SVB, with clients made up almost entirely of businesses, exceeded the FDIC’s typical $250,000 cap for deposit insurance protection. The comparable figure for Signature was roughly 90%.
• The Fed announced a new “Bank Term Funding Program” offering one-year loans to banks under easier terms than it typically provides. It also will relax terms for lending through its discount window, its main direct lending facility.
2. How will the Fed programs work?
The bank funding program will make loans of up to one year against collateral that will be valued at par, or its face value. This will allow banks to borrow larger amounts than if their collateral were posted at its current market value. Lending through the discount window will now also value collateral at par, rather than following the Fed’s usual practice of imposing a discount or “haircut” on the worth of posted collateral. And the Treasury Department will make up to $25 billion available as a backstop to the new bank funding program.
3. Why are regulators doing this?
Protecting the depositors of SVB and Signature is aimed at preventing more bank runs. Bank runs happen when depositors react to bad news about a bank by pulling their funds, leading others to do the same. They had mostly become a thing of the past after deposit insurance was introduced in the wake of the bank failures that deepened the Great Depression. But SVB’s combination of a client base concentrated in tech sector, where venture capital funding had largely dried up, leading to increased withdrawals, big losses on its investment portfolio and the anxiety of mostly uninsured customers combined to spark one that brought it down in days.
4. What’s the goal of the Fed lending changes?
They’re meant to address strains caused for banks by the Fed’s rapid increase of interest rates — it’s pushed them up faster than at any time in the last 40 years to combat the highest inflation seen since then. Banks make money in part by investing depositors’ cash. Many had put large amounts in longterm Treasuries or other government-backed bonds. These were safe investments in the sense that there’s little chance of default. But their value on the secondary market had been driven down by the Fed’s hikes — investors will pay less for bonds paying, for example, 1% when newly issued bonds are paying 2%. SVB had been forced to sell a large chunk of its portfolio to meet the increased withdrawals, leading to a $1.8 billion loss that triggered its demise.
5. How widespread is that problem?
US banks had booked $620 billion in unrealized losses on their available-for-sale and held-to-maturity debts at the end of last year, according to filings with the FDIC. The agency noted in March that those paper losses “meaningfully reduced the reported equity capital of the banking industry.” After SVB’s failure, a senior Treasury official cautioned that there were other banks that appeared to be in a similar situations to SVB and Signature.
6. Is this a bailout?
US regulators emphasized that taxpayers won’t be on the hook for protecting SVB and Signature deposits, and Treasury and Fed officials rejected the idea that the banks are being bailed out — showcasing the potential political sensitivities of the weekend moves. Officials said the money would come from the FDIC’s deposit insurance fund, which holds over $100 billion. The regulators said shareholders and certain unsecured debtholders will be wiped out, while management was fired. That solution didn’t sit well with everyone, including US Senator Tim Scott, the South Carolina Republican, who sees it promoting moral hazard in banking.
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