WASHINGTON (Reuters) – U.S. officials stepped in to stem financial fallout from the failure of tech startup-focused Silicon Valley Bank, saying that all customers will have access to their deposits starting on Monday.
The move will not lead to losses by American taxpayers and 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, Federal Reserve Chair Jerome Powell and Federal Deposit Insurance Corp Chair Martin Gruenberg on Sunday evening.
The moves reassured financial markets, sending stock indexes up in early Asia trading, but left questions unanswered about buyers for the banks, and left equity and bondholders of the two failed institutions with steep losses.
“Today we are taking decisive actions to protect the U.S. economy by strengthening public confidence in our banking system,” the federal regulators said in their Sunday evening statement. “This step will ensure that the U.S. banking system continues to perform its vital roles of protecting deposits and providing access to credit to households and businesses in a manner that promotes strong and sustainable economic growth.”
The officials said that 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.
New policies adopted Sunday will “wipe out” equity and bondholders in SVB and Signature Bank of New York while protecting all customers’ deposits, a senior U.S. Treasury official said.
The official said the steps were taken to stabilize the financial system and protect depositors, and did not constitute a bailout of either firm. No losses of either bank will be borne by U.S. taxpayers, the official said.
Together with the Federal Reserve’s decision to make funds available to eligible financial institutions and ensure they can meet the needs of all their depositors, the steps would “restore market confidence,” the official said.
Investors reacted by sending U.S. S&P 500 stock futures up 1.2%, while Nasdaq futures rose 1.3%. Fed fund futures surged in early trading to imply only a 28% chance of a half-point rate hike by the Federal Reserve when it meets next week, compared to around 70% before the SVB news broke last week.
A senior U.S. Treasury official said the actions taken Sunday would protect depositors, while providing additional support to the broader banking system, but officials and regulators were continuing to monitor the health and stability of the financial system.
“Going forward, we will work with Congress and the financial regulators to consider additional actions we could take in the future to strengthen the financial system,” the official said. No further details were provided on possible regulatory or legislative changes.
(Graphic: Total deposits in the U.S. banking system – here)
The Fed said it would make additional funding available through a new Bank Term Funding Program, which would offer loans up to one year to depository institutions, backed by Treasuries and other assets these institutions hold.
Earlier, Yellen had said she was working with banking regulators to respond after SVB became the largest bank to fail since the 2008 financial crisis.
In March 2020 when the coronavirus pandemic and lockdowns triggered financial panic, the Federal Reserve announced a series of measures to keep credit flowing by lowering borrowing costs and lengthening the terms of its 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.
(Graphic: The Discount Window – here)