In an extraordinary action to restore confidence in America’s banking system, the Biden administration on Sunday guaranteed that customers of the failed Silicon Valley Bank will have access to all their money starting Monday.
In a related action, the government shut down Signature Bank, a regional bank that was teetering on the brink of collapse in recent days. Signature’s customers will receive a similar deal, ensuring that even uninsured deposits will be returned to them Monday.
In a joint statement Sunday, Treasury Secretary Janet Yellen, Federal Reserve Chair Jerome Powell and Federal Deposit Insurance Corporation Chairman Martin J. Gruenberg said the FDIC will make SVB and Signature’s customers whole. By guaranteeing all deposits — even the uninsured money that customers kept with the failed banks — the government aimed to prevent more bank runs and to help companies that deposited large sums with the banks to continue to make payroll and fund their operations.
The Fed will also make additional funding available for eligible financial institutions to prevent runs on similar banks in the future.
“Monday will surely be a stressful day for many in the regional banking sector, but today’s action dramatically reduces the risk of further contagion,” Jefferies analysts Thomas Simons and Aneta Markowska said in a note to clients Sunday evening.
Wall Street investors were relieved that the government intervened. Dow futures were up nearly 300 points, or 0.9% late Sunday. S&P 500 and Nasdaq futures were both up 1.3%. Markets had tumbled more than 3% Thursday and Friday as investors feared more bank failures and systemic risk for the tech sector.
US taxpayers will not be on the hook for either facility, the regulators said. But shareholders and holders of unsecured corporate bonds will not be protected by the regulators’ plan.
“The US banking system remains resilient and on a solid foundation, in large part due to reforms that were made after the  financial crisis that ensured better safeguards for the banking industry,” the regulators said. “Those reforms combined with today’s actions demonstrate our commitment to take the necessary steps to ensure that depositors’ savings remain safe.”
The Fed tries to stave off the next crisis
The Fed’s new so-called Bank Term Funding Program is designed to prevent the next SVB from collapsing.
In its effort to curb inflation, the Fed sent interest rates surging at a historic pace last year. That means ultra-low-interest Treasury bonds that banks invested in just a couple of years ago crumbled in value. The FDIC reported that America’s banks are sitting on $620 billion of unrealized losses.
SVB sold billions of dollars of those securities at a steep loss last week to obtain enough cash to pay customers’ deposit withdrawals. That worrisome sign triggered a bank run that led to SVB’s collapse Friday.
To prevent a repeat at another bank, the Fed said it will offer banks loans for up to a year in exchange for US Treasury bonds and mortgage-backed securities that have tumbled in value. The Fed will honor the debt’s original value for the banks that take the loans.
And, as it did during the pandemic, the Treasury will also provide $25 billion in credit protection to ensure against banks’ losses. That should help banks easily access cash when they’re in need.
“The Fed ring fenced the SVB disaster and averted a crisis of epic proportions for the banking sector,” said Wedbush Securities’ Dan Ives.”This was a much needed move to avert contagion on the banking sector and consumer confidence. That said the Street knows there is never just one cockroach and investors will be laser focused on other regional banks that need to possibly shore up capital.”
Intervening to restore collapse
American regulators worked through the weekend on the substantive plan after SVB’s stunning and rapid collapse late last week. Treasury, Federal Reserve and FDIC officials have worked with the Biden administration over the past two days to develop the facilities.
Federal officials spent the weekend pressing for a sale of SVB. The FDIC opened an auction this weekend for bids to acquire the bank, the Treasury Department said in a briefing on Sunday with lawmakers in the California delegation, two sources familiar with the briefing told CNN.
By guaranteeing the deposits, the US government is trying to avoid two potentially risky scenarios from the bank failure fallout, both of which could have dire consequences: Other banks with similar profiles to SVB and Signature could be next to fail if customers lose faith that they will have ample cash to fund their deposits. And the tech companies that kept their cash with SVB could collapse if they were unable to make payroll or fund their operations with the $250,000 worth of deposits per account that the FDIC insures.
As of the end of last year, SVB said it had $151.5 billion in uninsured deposits, $137.6 billion of which was held by American customers. Customers yanked $42 billion from Silicon Valley Bank on Thursday, leaving the bank with $1 billion in negative cash balance, the company said in a regulatory filing.
A bailout of Silicon Valley Bank itself was not under consideration, Yellen said in an interview with CBS Sunday.
“Let me be clear that during the financial crisis, there were investors and owners of systemic large banks that were bailed out … and the reforms that have been put in place means that we’re not going to do that again,” Yellen told CBS. “But we are concerned about depositors and are focused on trying to meet their needs.”
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