SVB crisis: Second bank closes, U.S. rolls out emergency plan to curb financial disaster
The crisis over Silicon Valley Bank, which was closed over the weekend due to a raid on deposit withdrawals, continues to swell both domestically and abroad. Regulators closed a second bank overnight – Signature, which focused on cryptocurrencies.
U.S. financial authorities – the Treasury, the Federal Reserve and the Federal Deposit Insurance Corporation – announced in a joint statement that they will grant access to withdrawals from the failed banks as of Monday.
The agencies are in a frantic race to prevent a panic that would snowball into a widespread financial disaster in the United States. They additionally pledged in their joint statement that “no losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer.”
The emergency plan presented by the U.S. financial authorities was designed to prevent a major financial meltdown, and avoid what could have been a massive assault on the country’s banks during their opening hours at the start of the workweek. The Treasury warned that more banks may collapse, and promised – together with the regulators – that their depositors would not be harmed and that their money is secure.
U.S. President Joe Biden issued a statement on Sunday night, announcing that banking regulators and financial authorities worked to address the problems at the failed banks and reached a “solution that protects American workers and small businesses, and keeps our financial system safe. The solution also ensures that taxpayer dollars are not put at risk.”
SVB, which focuses on financial services for start-ups companies and plays a prominent role in the Israeli and U.S. high-tech sectors, was closed on Friday at the behest of U.S. regulators, after depositors flocked to withdraw their money from it.
The U.S. Federal Deposit Insurance Corporation seized $175 million of the bank’s deposits, making this the biggest bank failure since the global financial crisis in 2008. It is also the second-largest collapse ever in terms of assets of an FDIC-insured bank after the 2008 collapse of Washington Mutual – then the largest savings and mortgage bank in the US.
After heavy falls on Friday, the reaction this morning across world stock markets was mixed. In Tokyo, the Nikkei index dropped by 1.5 percent, but in Hong Kong the Hang Seng index jumped by 2.3 percent. In Seoul, the Kospi index rose by 0.3 percent and in Australia the stock market index was unchanged. Contracts on Wall Street indices are recording gains, and U.S. government bonds are also rising in Asian trade.
Investor Bill Ackman predicted that more banks in the U.S. will fail, despite the efforts to strengthen security in the banking system. He praised the government’s plan to manage the banks that would fail, and said that it was not a bailout at the expense of American taxpayers – the shareholders and bonds of SVB were wiped out. “If the Treasury Department, the Federal Reserve Bank and the FDIC had not intervened today, we would have had an attack on the banks this morning like in the 1930s, which would have caused enormous economic damage and hardship for millions of people.”
Signature’s collapse is the third in less than a week, after the closings of SVB on Friday and Silvergate on Wednesday. Silvergate, which announced receivership last week, is a Californian bank that specialized in lending to crypto companies. Regulators announced that they would fully refund depositors’ money in Signature, which was one of the largest banks that served the crypto industry, alongside Silvergate. Signature had $110 billion in assets and $88 billion in deposits as of the end of December 2022.
Another bank, First Republic Bank, said on Sunday that its financial condition was stable after securing additional financing from the Federal Reserve Bank and JPMorgan Chase. The additional financing gives the bank excess liquidity of 70 billion dollars – even before the money it is entitled to borrow from the Federal Reserve through the new emergency line. First Republic serves wealthy clients who have more than $250,000 in deposits, which is the FDIC-insured ceiling amount. Its shares have fallen 30 percent since Wednesday over fears that it will also succumb to a raid to withdraw deposits.
The rescue plan
To curb the spread of the crisis, the Federal Reserve and the Treasury Department established an emergency plan financed by the Federal Reserve’s Emergency Loan Authority. The FDIC insurance fund, whose role is to insure depositors and manage failed banks, will be used to return the money to bank depositors. Many of the deposits at SVB and Singer were not insured by the FDIC, but depositors will get their money back nonetheless.
The measures introduced in the emergency plan announced thus far are as follows:
The FDIC will break up SVB and Signature in a way that will protect all depositors.
The Federal Reserve established a financing program for banks, which offers one-year loans to banks on more favorable terms.
The Federal Reserve will ease loan requirements through its central credit line, called the discount window – direct loans it gives to banks and financial institutions.
A 25 billion dollar stabilization fund from the Treasury will support the Federal Reserve’s loan program. As part of the new loan program, banks, savings institutions, credit unions and other institutions which accept deposits will be offered a one-year loan in exchange for collateral that includes government bonds and mortgage-backed bonds.
The plan emphasizes that the bailout will not come at the expense of the taxpayers like the situation in 2008. The Treasury and Federal Reserve representatives explained that it was not a bailout due to the political problems involved. Though the 2008 bailout cost taxpayers, in the medium term the money invested in bailing out the large banks was returned, and even at a profit for the taxpayers.
Those who will pay the price are the banks’ shareholders and some of their unsecured creditors. The members of the banks’ managements were dismissed from their positions. Biden said that those responsible will pay the price, and that the supervision and regulation of large banks will be strengthened “so that we are not in this position again.”
World shock
The snowball started rolling on Wednesday, after depositors began withdrawing their money from SVB on Wednesday over concerns on the bank’s stability. A drop in the volume of deposits at the bank over recent months forced it to sell securities at a loss, and as a result, CEO Greger Becker announced on Wednesday that the bank would raise $2.5 billion in capital. The resulting panic led to an onslaught from depositors, and the bank’s shares – as well as many other banks in the US and the world – dropped. On Thursday, the depositors tried to withdraw 42 billion dollars from the bank. On Friday, it was already closed on the order of financial authorities, and the FDIC had begun to dismantle it.
The immediate concern in such a case is that withdrawing deposits in other banks, even those whose status is stable, will lead to their collapse. Bank runs are phenomenons which have inflamed financial crises in the past. Fear of such a systemic risk led to the joint announcement on Sunday evening.
The increase in interest rates in the United States, from 0.25 percent in March 2022 to 4.75 percent in February of this year, led to a sharp drop in the value of government and other bonds. As a result, banks, which are the largest holders of bonds on their balance sheets, suffer large losses – many of which have not yet happened. In the case of SVB, the realization of the loss on these securities from the need to return deposits was one of the factors which spurred the bank’s fall. Now that the Federal Reserve allows banks – wherever they are – to borrow money against these securities, they will not have to sell them in a panic and realize the losses, and will be able to maintain financial stability.
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An indirect result of the crisis is also that the prices of government bonds in the United States have risen and now the losses have been reduced, at least on paper.
The government attempted to sell SVB to a private company, and while the option is still on the table, this solution does not seem to be sufficient, and before the opening of the banks today, the plan to protect depositors was already announced.
The Federal Reserve will publish its interest rate decision next Wednesday under the shadow of this banking crisis. An aggressive increase of half a percentage point – which the markets anticipated before the eruption of this current disaster– may cause more cracks in the financial system.
But on the other hand, the Federal Reserve is obliged to curb inflation by raising interest rates, so it is stuck between a rock and a hard place. JPMorgan Chase’s chief U.S. economist explained in an analysis that the Fed wanted to limit credit to block the visit, but didn’t want it to happen abruptly in a way that may spiral out of control. The bank estimates that the Federal Reserve will choose a quarter-point-percent interest rate hike to 5 percent.