After SVB failure, US acts to shore up banking system confidence
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[March 13, 2023] By
Andrea Shalal, Howard Schneider and Pete Schroeder
WASHINGTON/SINGAPORE (Reuters) - U.S. authorities launched emergency
measures on Sunday to shore up confidence in the banking system after
the failure of Silicon Valley Bank threatened to trigger a broader
financial crisis.
After a dramatic weekend, regulators said the failed bank’s customers
will have access to all their deposits starting Monday and set up a new
facility to give banks access to emergency funds. The Federal Reserve
also made it easier for banks to borrow from it in emergencies.
While the measures provided some relief for Silicon Valley firms and
global markets on Monday, worries about broader banking risks remain and
have cast doubts over whether the Fed will stick with its plan for
aggressive interest rate hikes.
"We think the steps taken by the Fed, Treasury and (the Federal Deposit
Insurance Corp) will decisively break the psychological 'doom loop'
across the regional banking sector," said Karl Schamotta, chief market
strategist at Corpay in Toronto.
"But, fairly or not, the episode will contribute to higher levels of
background volatility, with investors watching warily for other cracks
to emerge as the Fed's policy tightening continues."
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Regulators also moved swiftly to close New York’s Signature Bank, which
had come under pressure in recent days.
The wider efforts to avert a crisis lifted Wall Street stock futures in
Asian trade on Monday, helping broader markets.
Lingering concerns about the financial sector weighed on bank shares in
Asia, with Japan's Mitsubishi UFJ hitting a two-month low and
Singapore's DBS a four-month low. Hong Kong shares of HSBC and Standard
Chartered pared early losses to trade near-flat.
European stock markets fell 0.6% in early trade, while banking stocks
fell just over 1%. U.S. stock futures were higher. Asian shares outside
Japan climbed over 1% while the blue-chip Nikkei tumbled 1%.
The Biden administration's intervention underscores how a relentless
campaign by the Fed and other major central banks to beat back inflation
is putting stress in the financial system and global markets.
Silicon Valley Bank (SVB), a mainstay for the startup economy, was a
product of the decades-long era of cheap money, with unique risks that
made it especially vulnerable. But as a run on the bank ensued last
week, worries that other regional banks shared similarities spread
quickly.
With the Fed poised to continue raising rates, investors said the
financial system may not be fully out of the woods yet.
Goldman Sachs analysts said they no longer expect the Fed to raise rates
by 25 basis points at its next policy meeting on March 21-22, amid the
stress in the banking sector.
"What investors have to expect coming into tomorrow and beyond is that
we are going to be dealing with a lot of event risk," said Michael
Purves, chief executive of Tallbacken Capital Advisors. "There are still
going to be lingering questions with other regional banks."
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DEPOSITORS PROTECTED
The collapse of SVB - the largest bank failure since 2008 - sparked
concerns over whether small-business clients would be able to pay their
staff, with the FDIC only protecting deposits of up to $250,000.
Some 89% of SVB's $175 billion in deposits were uninsured as of the end
of 2022, according to the FDIC.
All depositors, including those whose funds exceed the maximum
government-insured level, will be made whole, according to a joint
statement by U.S. Treasury Secretary Janet Yellen, Fed Chair Jerome
Powell and Federal Deposit Insurance Corp Chair Martin Gruenberg on
Sunday evening.
A senior U.S. Treasury official said the actions taken would protect
depositors, while providing additional support to the broader banking
system, but officials and regulators were continuing to monitor
financial system stability.
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![](../images/031323PIX/busine30.jpg)
A man puts a sign on the door of the
Silicon Valley Bank as an onlooker watches at the bank’s
headquarters in Santa Clara, California, U.S. March 10, 2023.
REUTERS/Nathan Frandino
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"The firms are not being bailed out. The depositors are being
protected," the official said.
The risk would be borne by the Deposit Insurance Fund, which has
sufficient funds to do so.
Providing the systemic risk exceptions was deemed quicker than
waiting for a possible buyer, the official said.
'WIPED OUT'
Treasury officials said depositors of New York's Signature Bank,
which was closed Sunday by the New York state financial regulator,
would also be made whole at no loss to the taxpayer.
Signature, like SVB, had a clientele concentrated in the tech
sector, and the securities on its balance sheet had eroded as
interest rates rose. As of September, almost a quarter of
Signature’s deposits came from the cryptocurrency sector, but the
bank announced in December that it would shrink its crypto-related
deposits by $8 billion.
While all customer deposits will be protected, new policies adopted
Sunday will "wipe out" equity and bondholders in SVB and Signature
Bank, a senior U.S. Treasury official said.
Together with the Fed's decision to ensure financial institutions
can meet the needs of all their depositors, the steps would "restore
market confidence," the official said.
Fed fund futures surged on Monday to imply only a 17% chance of a
half-point rate hike by the Federal Reserve when it meets next week,
well off the 70% before the SVB news broke last week.
The Fed said it would make additional funding available through a
new Bank Term Funding Program, which would offer loans of up to one
year to depository institutions, backed by Treasuries and other
assets these institutions hold.
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When the coronavirus pandemic triggered financial panic in March
2020, the Fed announced a series of measures to keep credit flowing
by lowering borrowing costs and lengthening the terms of direct
loans. By the end of that month, use of the Fed's discount window
facility shot up to more than $50 billion.
Through the middle of last week, before SVB's collapse, there had
been no indications of usage picking up, with Fed data showing
weekly outstanding balances of $4 billion to $5 billion since the
start of the year.
UK FALLOUT
In Britain, where SVB has a subsidiary, the government and Bank of
England held talks over weekend to find a solution that would avert
the local lender from failing.
In a move reminiscent of the financial crisis era, early on Monday
in London HSBC announced it was buying Silicon Valley Bank UK for 1
pound ($1.21). It said the subsidiary had loans of around 5.5
billion pounds and deposits of around 6.7 billion pounds as of March
10.
While SVB UK is small - HSBC's balance sheet exceeds $2.9 trillion -
concerns that SVB's failure would cause Britain's start-up industry
to seize up had prompted calls from the sector for government to
intervene.
British start-ups backed by venture capital have around 2.5 billion
pounds, largely in deposits, "locked" in SVB UK, according to a
weekend survey by an industry body, seen by Reuters.
($1 = 0.8256 pounds)
(Reporting by Lananh Nguyen, Paritosh Bansal, Tatiana Bautzer, Nupur
Anand, Ira Iosebashvili and Dan Burns in New York, and Pete
Schroeder, Jason Lange, Sarah N. Lynch, Rami Ayyub, David Morgan and
Andrea Shalal in Washington, Kanjyik Ghosh and Akanksha Khushi in
Bengaluru, and Andrew MacAskill, William Schomberg, Amy-Jo Crowley
and Pablo Mayo in London; Writing by Megan Davies, Alexander Smith,
Leslie Adler, Simon Lewis and Vidya Ranganathan; Editing by Deepa
Babington, Heather Timmons, Diane Craft, Leslie; Adler, Sam Holmes,
Elisa Martinuzzi and Catherine Evans)
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