US says all SVB deposits safe, creates new backstop for banks

Published Mon, Mar 13, 2023 · 08:29 AM

US financial regulators moved on Sunday (Mar 12) to protect depositors’ funds following the collapse of Silicon Valley Bank (SVB) and set up a new financial backstop, seeking to stem fears that households and businesses would flee smaller lenders. The Treasury Department, Federal Reserve and Federal Deposit Insurance Corporation (FDIC) jointly announced the efforts Sunday aimed at strengthening confidence in the banking system after SVB’s failure spurred concern about spillover effects. SVB’s collapse into FDIC receivership — the second-largest US bank failure in history behind Washington Mutual in 2008 — came suddenly on Friday, following a frenetic couple of days where its long-established customer base of tech startups yanked deposits. After SVB’s collapse, a number of other regional lenders saw their shares plunge amid concerns about the financial stability of smaller banks. Treasury Secretary Janet Yellen said the actions will protect “all depositors”, signalling aid to those whose accounts exceed the typical US$250,000 threshold for FDIC insurance. SVB depositors “will have access to all of their money starting Monday, Mar 13”, the government said in a statement, adding that taxpayers won’t be responsible for any losses associated with SVB’s resolution. In a sign that the situation had worsened, the government also said Signature Bank was closed by New York state financial regulators on Sunday and all depositors there will also have access to their money on Monday. A senior Treasury official, in a briefing call with reporters, said there are other banks that appeared to be in similar situations to SVB and Signature and regulators had concerns about their depositors. The official also said the steps didn’t constitute a bailout, as equity and bondholders of SVB and Signature would be wiped out.

Fed programme

The Fed in a separate statement said it’s creating a new “Bank Term Funding Programme” that offers loans to banks under easier terms than are typically provided by the central bank. Fed officials said on a briefing call that the facility will be big enough to protect uninsured deposits in the wider US banking system. It was invoked under the Fed’s emergency authority allowing for the establishment of a broad-based programme under “unusual and exigent circumstances”, which requires Treasury approval. The Treasury will “make available up to US$25 billion from the Exchange Stabilization Fund as a backstop” for the bank funding programme but the Fed doesn’t expect to draw on the funds, it said. Under the new programme, which provides loans of up to one year, collateral will be valued at par, or 100 cents on the dollar. That means banks can get bigger loans than usual for securities that are worth less than that — such as Treasuries that have declined in value as the Fed raised interest rates. Normally, under the Fed’s main lending programme, known as the discount window, the Fed typically lends money at a discount against the assets provided as collateral, a practice known as haircuts. The Fed said the loans under the discount window, which are up to 90 days, will now be subject to the same collateral margins as the new bank funding facility. The Fed’s emergency lending programme is “an admission not only of systemic risk but that the risks are so unusual and exigent that failure to invoke this liquidity could create a financial crisis”, said Peter Conti-Brown, associate professor at the University of Pennsylvania’s Wharton School. BLOOMBERG