The US administration intervened yesterday with a series of emergency measures to shore up confidence in the banking system, after the failure of Silicon Valley Bank (SBV) threatened to unleash a broader systemic crisis.
US regulators said the failing bank’s clients will have access to all their deposits starting today and set up a new mechanism to give banks access to emergency funds. The Federal Reserve (Fed) also made it easier for institutions to obtain loans in an emergency.
Regulators also moved quickly to shut down Signature Bank of New York, which has come under pressure in recent days.
The so-called Bank Term Financing Program will offer loans of up to one year, US Treasury bonds and other “qualified assets” will be taken as collateral, which will be valued at par.
The program is intended to eliminate the “need for an institution to quickly sell those securities in times of stress” and would be enough to cover all uninsured US deposits, the Fed said.
The implementation of the program has the support of the Treasury, which contributed 25,000 million dollars.
Joe Biden, President of the United States, issued a statement late at night announcing that the Secretary of the Treasury and the director of the National Economic Council worked diligently with banking regulators to solve the problems of the two banks.
The American people and businesses can trust that their bank deposits will be there when they need them,” the statement read.
“I am firmly committed to holding those responsible for this mess fully accountable and to continuing our efforts to strengthen supervision and regulation of the big banks so that we do not find ourselves in this situation again,” he promised.
“The measure will mean no loss to US taxpayers and all depositors, including those whose funds exceed the maximum level insured by the government, will be compensated,” said Yellen, US Treasury Secretary; Fed Chairman Jerome Powell and Martin Gruenberg, head of the Federal Deposit Insurance Corp,
The new policies adopted yesterday will kill off shareholders and bondholders of SVB and Signature Bank of New York, while protecting the deposits of all clients, a senior Treasury official said.
He added that the measures were taken to stabilize the financial system and protect depositors, and do not constitute a bailout of either company. US taxpayers will suffer no loss at either bank.
Coupled with the Fed’s decision to make funds available to eligible financial institutions and ensure they can meet the needs of all their depositors, the measures will restore market confidence, the official said.
In this context, it was announced that today the President of the United States, Joe Biden, will seek to inject calm and give a message after the bankruptcy of the SVB and Signature Bank.
Government seeks to avoid contagion
Janet Yellen pointed out that the government wants to avoid financial contagion after the failure of Silicon Valley Bank, while ruling out a rescue of the entity.
“We want to make sure that the problems that exist in one bank don’t cause contagion to others that are strong,” Yellen said during an interview on CBS.
The Deposit Insurance Agency (FDIC), a branch of the government, took control of SVB on Friday, on the brink of implosion under the effect of massive withdrawals from its clients. Nearly 96% of deposits at that bank are not covered by the FDIC’s refund guarantee. About a fifth of its total deposits were related to digital assets as of December 31.
The 2008 crisis and its lessons
Yellen said that the reforms made after the 2008 financial crisis closed the door to a bailout of the SVB.
“During the financial crisis there were investors and owners of big banks that were bailed out and the reforms that have been put in place mean we are not going to do that again,” he said.
In September 2008, to prevent a collapse of the financial system, the US authorities injected hundreds of billions of dollars into most of the large market institutions, funds that were later recovered by the government.
Various personalities from finance and the world of new technologies have been advocating since Friday for the rescue of SVB.
Many say they are concerned, both about the stability of the banking system and about the repercussions of the bank’s failure on the technology sector.
SVB boasted of owning almost half of the life sciences and technology companies financed by US investors.
“Many depositors are small businesses that need to be able to access their funds to pay their bills and employ tens of thousands of people (…) It is a problem and we are working with regulators to find a solution,” Yellen said.
On Sunday, UK Chancellor of Finance Jeremy Hunt said the fall in the SVB poses a serious risk to Britain’s tech sector.
Several businessmen also warned of a possible shock wave for Indian tech startups, some of which were SVB clients.
Signature Bank joins
In a statement issued yesterday by the Board of Governors of the Federal Reserve System, the closure of Signature Bank, New York was announced.
“We are announcing a similar systemic risk exception for Signature Bank, New York, which was closed (…) All depositors of this institution will be of integrity. As with the Silicon Valley Bank resolution, the taxpayer will bear no loss.”
Several venture capitalists said that Signature was the most exposed lender after SVB because of its client base with high exposure to cryptocurrencies and technology companies, a high proportion of uninsured deposits.
A bank for technology startups
Founded 40 years ago, in November 1983, Silicon Valley Bank (SVB) focused on the technology sector, most of its clients were startups.
He opened accounts with small companies in the technology sector that the big lenders did not turn to see and, in addition, he lent them money.
As the Silicon Valley region boomed from the pandemic, so did the banking institution, to become the 16th-largest bank in the United States by the end of 2022, with around $209 billion in assets.
Above all, it was the bank’s deposits that grew considerably between the end of 2017 and 2021, its clients hoarding cash and needing to deposit it in bank accounts, rather than borrow.
Deposits in SVB grew 330%, going from 44,000 to 189,000 million dollars between the end of 2017 and 2021.
In contrast, its loan book had an expansion of 187%, going from 23,000 to 66,000 million dollars in the same period.
It was in the midst of this technological boom, and the considerable increase in deposits, that the SVB saw the need to start investing in interest-bearing assets.
By the end of 2021, it had already invested around $128 billion, most of it in treasury bonds and mortgage loans.
Its market value also reached a peak, with a maximum of 44,311 million dollars, at the close of November 3, 2021.
The policy that central banks implemented last year to increase interest rates to contain inflation, caused a fall in bond prices and a collapse in the US technology sector.
As a result, startups that were clients of the SVB drained their deposits faster than the bank expected, at the same time that the fall in bond prices caused losses in its investment portfolio, leaving the lender highly exposed.
These factors were what caused the collapse of the financial institution last week.
SVB is the first big bank to fail since the 2008 crisis, with its assets in the hands of regulatory authorities and thousands of clients in uncertainty.
The SVB closed Thursday with a Nasdaq market capitalization of $6.278 billion, a plunge of 85.83% from the high.
