Editor's Note: This story is being updated on a regular basis as Treasury and federal agencies release information on an ongoing basis.
WASHINGTON–As part of a weekend spent dealing with the second-largest bank failure of all time and the shutdown of a second bank on Sunday, Treasury officials reassured the markets and Americans the banking system is “safe,” with the Federal Reserve announcing Sunday it is making available additional funding to eligible depository institutions--including credit unions--to help “assure banks have the ability to meet the needs of all their depositors."
After closing the $212-billion Silicon Valley Bank late last week, on Sunday New York’s state regulators and the FDIC announced a “similar systemic risk exception for Signature Bank in New York, which was closed by the state authority. The FDIC has created Signature Bridge Bank now that it is under government control.
“All depositors of this institution will be made whole,” said a joint statement from Treasury, the Federal Reserve and FDIC. “As with the resolution of Silicon Valley Bank, no losses will be borne by the taxpayer.
On Sunday, officials took the unusual step of designating both SVB and Signature Bank as a "systemic risk to the financial systemm," which provides regulators with additional flexibility to guarantee uninsured deposits, which is especially critical for SVB, where one estimate was that as much as 90% of deposits were over the insurance cap.
Prior to the closure of Signature Bank, one well-known investor was saying the government had “48 hours” to find a resolution before problems potentially spread to other banks.
New Bank Created
Late last week the California Department of Financial Protection and Innovation joined with the FDIC in shuttering Silicon Valley Bank. Effective with the closure, the FDIC created the Deposit Insurance National Bank of Santa Clara (DINB) and immediately transferred to the DINB all insured deposits of Silicon Valley Bank (SVB).
The bank is larger than any single credit union.
According to the Fed, the new funding is being made available through the creation of the Bank Term Funding Program (BTFP), which is offering loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral.
“These assets will be valued at par. The BTFP will be an additional source of liquidity against high-quality securities, eliminating an institution’s need to quickly sell those securities in times of stress,” the Fed said, adding that with the approval of the Treasury Secretary, the Department of the Treasury will make available up to $25 billion from the Exchange Stabilization Fund as a backstop for the BTFP.
The Federal Reserve said it does not anticipate that it will be necessary to draw on these backstop funds.
'Bolstering Capacity'
“This action will bolster the capacity of the banking system to safeguard deposits and ensure the ongoing provision of money and credit to the economy,” the Federal Reserve said, adding it is “prepared to address any liquidity pressures that may arise.”
“After receiving a recommendation from the boards of the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve, Treasury Secretary Yellen, after consultation with the President, approved actions to enable the FDIC to complete its resolution of Silicon Valley Bank in a manner that fully protects all depositors, both insured and uninsured,” the Fed said. “These actions will reduce stress across the financial system, support financial stability and minimize any impact on businesses, households, taxpayers, and the broader economy.”
The Fed reminded that depository institutions may obtain liquidity against a wide range of collateral through the discount window, which remains open and available. In addition, the discount window will apply the same margins used for the securities eligible for the BTFP, further increasing lendable value at the window, it added.
Customers Struggle to Access Funds
The move to seize Silicon Valley Bank last week put $175 billion under control of the FCIC. Last week, many of the customer companies in the technology sector for which Silicon Valley Bank is named were struggling to make withdrawals and cover payrolls. Axios reported the failure of SVB was tied, in part, to the plunge in the value of bonds it acquired during boom times, “when it had a lot of customer deposits coming in and needed somewhere to park the cash. But SVB isn’t the only institution with that issue. U.S. banks were sitting on $620 billion in unrealized losses (assets that have decreased in price but haven’t been sold yet) at the end of 2022, according to the FDIC, Axios reported.
| The New York Times' Dealbook reported that the collapse may have been an "unforced, self-inflicted error: The bank’s management chose to sell $21 billion of bonds at a $1.8 billion loss, in large part, it appears, because many of those bonds were yielding an average of only 1.79% at a time when interest rates had risen drastically and the bank was starting to look like an underperformer relative to its peers. Moody’s was considering downgrading its rating. The bank’s management — with the help of Goldman Sachs, its adviser — chose to raise new equity from the venture capital firm General Atlantic and also to sell a convertible bond to the public." |
| The New York Times went on to add that it "isn’t clear if the bond sale or the fund-raising, at least initially, had been made under duress. It was meant to reassure investors. But it had the opposite effect: It so surprised the market that it led the bank’s very smart client base of venture capitalists to direct their portfolio clients to withdraw their deposits en masse." |
Fears of Other Failures
The failure of SVB, as it’s known, affected shares in a number of other banks in which investors are now skittish and raised concerns that other financial firms could suffer the same fate as rising interest rates put pressure on the banking sector. Those fears were being expressed prior to the action taken with Signature Bank.
SVB was the subject of a deposit run late last week prior to being shut down.
Treasury Secretary Janet Yellen told CBS’ “Face the Nation” she is aware many small businesses are counting on funds held at Silicon Valley Bank and that regulators are working to address those concerns.
The Treasury secretary suggested that an acquisition of Silicon Valley Bank is one of a range of possible outcomes and that regulators are trying to address the situation “in a timely way,” the New York Times reported.
“We’re very aware of the problems depositors have, many of them are small businesses that employ people across the country and of course this is a significant concern and we’re working with regulators to try to address these concerns,” Yellen said.
Americans Should ‘Feel Confident’
The Treasury secretary, speaking before announcing the new funding, said that the next steps would ultimately be up to the FDIC.
Yellen further told CBS “Americans need to feel confident that the banking system is safe and sound, that it can meet the credit needs of households and businesses and that depositors don’t have to worry about losing access to their money. Those are goals that we all embrace...We want to make sure that the troubles that exist at one bank don’t create contagion to others that are sound,” Yellen said.
The Best Case
Sen. Mark Warner (D-VA said he had been in talks with regulators, the White House and the Federal Reserve and that the best outcome would be to find a buyer for the bank’s assets before markets opened in Asia.
“Shareholders in the bank are going to lose their money. Let’s be clear about that. But the depositors can be taken care of, and the best outcome will be an acquisition of SVB,” Warner said.
Responding to reports that the Silicon Valley Bank CEO Gregory Becker sold $3.6 million in stock weeks before the collapse has led to at least one member of Congress to demand “money should be clawed back” and “given to the depositors.”
According to Bloomberg, the Fed and FDIC have also been considering the creation of a fund to backstop deposits at banks that run into trouble, Bloomberg reported.
48 Hours to Act
Bill Ackman, the billionaire hedge fund manager, told Bloomberg the failure to protect SVB depositors could spark withdrawals of uninsured deposits elsewhere.
“These withdrawals will drain liquidity from community, regional and other banks and begin the destruction of these important institutions,” the news service. “The government has about 48 hours to fix a-soon-to-be-irreversible mistake. The unintended consequences of the government’s failure to guarantee SVB deposits are vast and profound and need to be considered and addressed before Monday. Otherwise, watch out below.”
Branches to Open
Last week the FDIC said the bank’s main office and 17 branches are slated to open today, March 13, under the DINB name. According to the federal regulator, uninsured depositors will be paid an advance dividend within the next week, while uninsured depositors will get a receivership certificate for the remaining amount of their uninsured funds.
As the assets of Silicon Valley Bank are sold off, the FDIC said, future dividend payments may be made to uninsured depositors.