After SVB Failure, US Officials Step in to Boost Confidence in Banking System

After Silicon Valley Bank (SVB) failed and threatened to cause a larger systemic crisis, US officials have taken emergency measures to shore up confidence in the banking system. On Sunday, regulators announced that customers of the failed bank could access all their deposits starting from the next day. Moreover, officials created a new facility for banks to obtain emergency funds, while making it easier for banks to borrow from the Federal Reserve in emergencies.

Biden administration’s intervention signals the stress that the relentless campaign by the Federal Reserve and other central banks to beat back inflation is putting on the financial system and global markets. Following the Biden administration’s announcement, investors sent US and Nasdaq stock futures up significantly.

The Federal Reserve’s Response

SVB’s failure, a mainstay for the startup economy, was a product of the era of cheap money. As speculation of a possible rise in interest rates by the Federal Reserve persist, investors are concerned that the financial system may not be fully out of the woods. However, the Federal Reserve held a policy meeting on the 21st and 22nd of March, to make sure that the system remains stable.

Through the middle of last week when SVB’s collapse occurred, there were no indications of concerns among the public regarding the use of the Fed’s Discount Window facility. The facility uses a system of Term Auction Facility loans for banks to provide funds for overnight and very short-term loans to specific bank customers who need to borrow from the Fed to pay bills or make loans, etc. Before the SVB collapse, Fed data showed weekly outstanding balances of approximately $4 billion to $5 billion since the beginning of the year.

In March 2020, the Fed made a series of measures to keep credit flowing by lowering borrowing costs and lengthening the terms of its direct loans when the coronavirus pandemic and lockdowns triggered a financial panic. By the end of that month, use of the Fed’s discount window facility shot up to more than $50 billion.

Following the SVB failure, the Federal Reserve’s Board of Governors’ statement, issued on the 20th of March, 2023, announced that it would make additional funding available through a new Bank Term Funding Program. The program would offer loans of up to one year to depository institutions, backed by Treasuries and other assets these institutions hold.

Depositors Protection

SVB’s collapse sparked concerns about whether small-business clients would be able to pay their staff members, considering that the Federal Deposit Insurance Corporation only protects deposits up to $250,000. Deposits will be made whole for all depositors, including those whose funds exceed the maximum government-insured level.

A report from the FDIC indicates that 89% of SVB’s $175 billion in deposits were uninsured at the end of 2022. A senior US Treasury official said the measures would protect depositors while providing additional support to the broader banking system.

The official continued by saying, “The firms are not being bailed out. The depositors are being protected.” The risk would be borne by the Deposit Insurance Fund, which has sufficient funds to do so. The official said that the actions taken would ensure that companies with their deposits in the failed SVB were still able to keep paying their workers, avoiding potential large-scale implications for the US economy.

New policies adopted by regulators on the 20th of March, 2023, will “wipe out” equity and bondholders in Silicon Valley Bank and Signature Bank. The latter was closed by the New York State financial regulator. Depositors of Signature Bank would also be made whole without loss to taxpayers. All depositors’ protection was announced in a joint statement by the US Treasury Secretary, the Federal Reserve Chair, and the Federal Deposit Insurance Corp Chair.

Conclusion

The steps taken by the Federal Reserve, the Treasury, and FDIC are expected to decisively break the psychological “doom loop” across the regional banking sector, according to Karl Schamotta, chief market strategist at Corpay in Toronto. Still, the episode will contribute to higher levels of background volatility, with investors watching warily for other problems that may emerge as the Fed’s policy tightening continues.

Investors should anticipate dealing with a lot of event risk in the coming days, according to Michael Purves, the chief executive of Tallbacken Capital Advisors. Despite the officials’ declaration that all customer deposits will be protected, investors will keep a watchful eye on the situation. More lingering questions about other regional banks’ future will arise, and investors will closely monitor the situation as the Fed’s policy tightening continues.