Silicon Valley Bank collapse prompts concerns over banking sector

Biden administration has insisted the arrangements announced on Sunday evening did not constitute a ‘bailout’

The collapse of Silicon Valley Bank (SVB) on Friday was the second biggest in US history in terms of assets. It immediately raised concerns as to whether the move would spark a wider crisis in the financial sector in the US.

The news that a second institution, Signature Bank in New York, had also been closed by authorities over the weekend was likely to add to the nerves and create instability when the banks and markets opened on Monday.

Under federal law in the US bank deposits of up to $250,000 are automatically insured. However, SVB had a large number of customers with accounts holding far higher amounts and were therefore outside the guarantee.

The fear in Washington was that if depositors at SVB lost their money above the $250,000 threshold those with accounts in similar regional banks across the country could become afraid for the safety of their own funds and seek to move them into the larger Wall St institutions. This could have generated a crisis across the sector.

READ MORE

Companies owning such deposits above $250,000 could also have faced difficulties meeting staff payroll, paying bills or funding future operations, leading to further difficulties in the economy.

At about 6.15pm on Sunday on the east coast in the US and ahead of the opening of the markets in Asia, the Federal Reserve, the department of the treasury and the Federal Deposit Insurance Corporation announced in a joint statement that “depositors will have access to all of their money starting Monday, March 13th”.

The move will guarantee all customers’ money held by both SVB and Signature – even deposits above the previous $250,000 threshold.

Separately, the Federal Reserve announced it was creating a new lending facility for US banks and financial institutions to give them greater support against financial risks caused by the collapse of SVB on Friday.

“The additional funding will be made available through the creation of a new bank term funding programme (BTFP), offering loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging US treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral.

“These assets will be valued at par. The BTFP will be an additional source of liquidity against high-quality securities, eliminating an institution’s need to quickly sell those securities in times of stress.”

The aim of the initiative is to help financial institutions that have seen falls in the market value of long-term assets they are holding as interest rates have risen in the US over recent months.

Institutions, like Silicon Valley Bank, which were sitting on large “unrealised losses” due to the hike in interest rates, will now be able to borrow against the original value reducing any requirement for emergency fire sales.

The Biden administration has insisted that the arrangements announced on Sunday evening did not constitute a “bailout” and that shareholders and holders of unsecured bonds will be burned following the collapse.

Financial authorities also insisted that US taxpayers would not be on the hook for the measures announced, Depositors’ money will be backstopped by a fund of more than $100 billion into which US banks pay regularly.

The success or otherwise of the moves announced by US financial authorities on Sunday evening will likely be determined by the reaction of deposit holders and the markets on Monday. However, even if further instability in the banking sector is avoided the Biden administration will face undoubted political attacks over the current situation. Already opposition Republicans have blamed US president Joe Biden for the economic conditions that led to the collapse of SVB, while he will almost certainly come under fire for allegedly backstopping tech firms of wealthy California depositors.