The US intervened to Save the SVB Bank and Calm the Financial System

World | March 13, 2023, Monday // 08:16
Bulgaria: The US intervened to Save the SVB Bank and Calm the Financial System @Wikimedia Commons

The US administration stepped in on Sunday with a series of emergency measures to shore up confidence in the banking system after the failure of Silicon Valley Bank threatened to trigger a wider systemic crisis.

After a dramatic weekend, US regulators said customers of the failed bank would have access to all their deposits from Monday and regulators created a new tool to give banks access to emergency funds. The Federal Reserve also made it easier for banks to borrow from it in emergencies.

Regulators also quickly shut down New York's Signature Bank, which had been under pressure in recent days.

President Joe Biden said Sunday night that the Treasury secretary and the director of the National Economic Council have been working diligently with bank regulators to address the problems at the two banks.

"The American people and American businesses can rest assured that their bank deposits will be there when they need them," Biden said in a statement. "I am determined to hold those responsible for this mess fully accountable and to continue our efforts to strengthen supervision and regulation of the larger banks so that we are not in this situation again."

A sense of relief swept through Silicon Valley and global markets as the regulator's announcement came just as US futures opened for trading in Asia.

"We think the steps taken by the Fed, the Treasury Department and the FDIC will decisively break the psychological sense of doom in the regional banking sector," said Karl Schamotta, chief market strategist at Corpay in Toronto. "But, fair or not, this episode will contribute to higher levels of background volatility, with investors cautiously watching for other cracks to appear as the Fed's policy tightening continues."

The intervention of the Biden administration highlights how the relentless campaign by the Fed and other major central banks to beat inflation is creating stress in the financial system and global markets, commented "Reuters".

Silicon Valley Bank (SVB), a pillar of the so-called startup economy, was a product of a decades-long era of cheap money combined with the taking of unique risks that made it particularly vulnerable. But since last week's run on the bank followed, concerns that other regional banks shared similarities spread quickly.

With the Federal Reserve poised to continue raising interest rates, investors said the financial system may not yet be completely out of harm's way. The Fed will hold its next policy meeting on March 21-22.

"What investors should expect from tomorrow and beyond is that we will face a lot of event risk," said Michael Purves, CEO of Tallbacken Capital Advisors. "There will still be outstanding issues with other regional banks."

The collapse of SVB - the biggest bank failure since 2008 - has raised concerns about whether small business customers will be able to pay their employees, with the Federal Deposit Insurance Corporation (FDIC) only protecting deposits of up to $250,000.

About 89% of SVB's $175 billion in deposits were uninsured at the end of 2022, according to the FDIC.

All depositors, including those whose funds exceed the maximum level of government insurance, will be bailed out, according to a joint statement by US Treasury Secretary Janet Yellen, Federal Reserve Chairman Jerome Powell and Federal Deposit Insurance Corp. Chairman Martin Gruenberg on Sunday evening.

A senior U.S. Treasury official said the actions taken Sunday would protect depositors while providing additional support for the broader banking system, but officials and regulators continued to monitor the health and stability of the financial system.

The risk will be assumed by the Bank Deposit Guarantee Fund, which has sufficient funds for this.

"Anytime a bank fails, especially one with billions of dollars in deposits, it's a matter we take seriously," the official said, pointing to potentially "major consequences" for the U.S. economy if companies with deposits at Silicon Valley Bank were unable to continue paying their workers.

Granting the systemic risk exemptions is considered faster than waiting for a potential buyer, the official said.

"Going forward, we will work with Congress and financial regulators to consider additional actions we might take in the future to strengthen the financial system," the official said. No further details were provided on possible regulatory or legislative changes.

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Tags: US, banks, financial, Silicon Valley

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