The measures, which include guaranteeing all SVB’s deposits, are designed to instill confidence in the banking system. The announcement was made jointly by the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp. on Sunday night.
Regulators announced on Sunday that they have taken control of Signature Bank, one of the main banks for cryptocurrency firms. Officials said depositors at the Bank of New York would be covered in full.
A senior Treasury official said the measures did not constitute a bailout, as the shares and bondholders in SVB and underwriting would not be protected.
The central bank and the Treasury separately said they would use emergency lending authorities to meet bank withdrawal requests and make additional funds available in an additional effort to prevent runs on other banks.
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William Dudley, who served as the president of the New York Fed from 2009 to 2018, said, “That would be enough to prevent a depositor panic. – Central banks.”
Authorities took the unusual step of designating SVB and Signature Bank as a systemic risk to the financial system, giving regulators flexibility to guarantee uninsured deposits.
Depositors at SVB will receive their money on Monday, officials said.
The government’s Bank Deposit Insurance Fund will cover all deposits in both banks instead of the standard $250,000. Federal regulators said losses to the government’s finances would be recovered through special assessments on the banks and US taxpayers would not bear any losses.
In a separate statement late Sunday night, the central bank said it was “closely monitoring conditions across the financial system and stands ready to use its full range of tools to support households and businesses, and will take additional measures as appropriate.”
The central bank said banks will get additional funding through a new “bank term financing program” that provides loans of up to one year to banks that pledge U.S. Treasuries, mortgage-backed securities and other collateral. Up to $25 billion from the Treasury’s transaction-stabilization fund will be rolled back into the central bank lending program.
Many of those bonds have fallen in value as the central bank has raised interest rates. These regulations allow banks to borrow for 100 cents on the dollar, with the bonds trading below that value, leaving the government vulnerable to losses incurred by the banks. Critics said the move would provide a backdoor subsidy to bank investors and management that failed to properly manage interest rate risks.
Those terms are more generous than emergency bank loans of up to 90 days offered through the central bank’s flagship “discount window” loan program. The scheme would mean that banks facing withdrawals would not have to liquidate bonds and take losses to collect the money.
Another lender is First Republic Bank,
It said on Sunday it had boosted its funding with additional funding from the Fed and JPMorgan Chase & Co. The new funding gives the bank $70 billion in unused liquidity, excluding funds eligible to borrow through the new central bank lending facility.
First Republic caters to wealthy customers with balances larger than the FDIC insurance limit. Investors worried that the bank could suffer the same damage as Silicon Valley claims to the bank. Shares of Republic have fallen about 30% since Wednesday.
Sunday evening’s announcement capped a frenzied weekend in which regulators were considering a bid for the failed Silicon Valley bank. Regulators struggled to find a buyer on Sunday and took the lead in holding back deposits, according to a senior Treasury official, as they sought to announce a resolution to depositors by Monday morning.
Federal Reserve Chairman Jerome Powell scrapped plans to attend a regular meeting of central bankers in Basel, Switzerland on Sunday and instead stayed in Washington to manage the crisis response.
The $110 billion signature and $209 billion SVB are the highest casualties of the central bank’s campaign to slow the economy and reduce inflation. The central bank has raised interest rates by 4.5 percentage points over the past year, the fastest run-up since the early 1980s, and officials have signaled more increases.
Calm nerves about access to uninsured bank deposits allow the central bank to focus more tightly on fighting inflation by raising interest rates. Before the SVB failed last week, officials signaled they were on track to raise rates by at least a quarter of a percent at their next meeting, March 21-22, as they did last month.
“If it’s limited to a relatively small number of banks and the underlying problem isn’t as inherent in the economy as it was during the global financial crisis, I don’t think there’s a strong case to stop the central bank hiking.” said Mr. Dudley.
At the same time, tougher federal interventions could be an uncomfortable coda to the rollback of post-financial crisis regulations on small and medium-sized banks that have taken place in recent years. Officials on Sunday signaled they may weigh tougher capital requirements and liquidity rules, reversing some steps taken during the Trump administration to ease restrictions on smaller banks.
“We learned today that a $200 billion bank is too big to fail — or too big to be allowed to fail with losses to large depositors, the Bank Resolution Body considers,” said former Fed Governor Daniel Tarullo. The central bank’s point person in regulation following the financial crisis. “While I understand the government’s concern about the economic downturn, it strikes me that today’s actions have major implications for financial regulation.”
Federal regulators are trying to balance their desire to prevent a broader financial contagion while avoiding the harmful political optics of bailing out financial institutions at taxpayer expense. There are no restrictions on compensation of bank executives in the new loan schemes.
Biden administration officials repeatedly said Sunday that their moves were aimed at protecting depositors and would allow them to get paid this week at no cost to taxpayers. A senior Treasury official said the central bank’s lending program would prevent further bank runs.
“I am committed to holding those responsible for this mess fully accountable and continuing our efforts to strengthen oversight and regulation of the big banks so that we are never in this position again,” President Biden said in a statement.
Nicholas Donahue, co-founder of real estate startup Atmos, said he was prepared to finalize a loan from Khosla Ventures to help make payroll next week after hearing the news.
“I feel relieved that I can go back to my team tonight and say that business will be good,” Mr. Donahue said. “It’s a lot of weight off my shoulders.”
New York-based Signature is one of the few banks to go big in crypto, providing accounts and other services to crypto startups and big investors in digital assets. It eventually became one of the leading banks in the crypto market.
That focus and a bespoke payment system for crypto firms helped the bank double deposits in two years. By early 2022, around 27% of its deposits came from its digital asset clients.
The bank’s exposure to crypto became a problem as the year went on. A deepening market rout followed the collapse of Sam Bankman-Fried’s crypto exchange FTX in November, draining billions of dollars in deposits.
Shares of Signature fell 23% on Friday, its worst day since going public in 2004. The bank had assets of $110 billion and deposits of $88.6 billion at the end of 2022.
SVB faced its own unique challenges. Bank deposits surged after the pandemic, and the central government’s policy response increased in 2021 with tech companies cashing in. The Santa Clara, Calif.-based lender sees total deposits of nearly $200 billion by March 2022, up from more than $60 billion. years ago.
Because it invested most of that money in long-dated securities whose values have fallen as interest rates have risen, it faces a big loss if it has to liquidate its securities portfolio. At the same time, its depositors are increasingly concentrated in the tight-knit world of startups and venture-capital firms, making the bank uniquely vulnerable to a run.
A slowdown in tech over the past year, coupled with rising deposit costs, has seen more of its venture-capital-backed clients burn cash or pull deposits.
Startups used the funds more aggressively last week to avoid potential losses on deposits above the $250,000 limit insured by the federal government. Those withdrawals, encouraged by some venture capitalists, sparked a classic bank run that the FDIC stepped in on Friday.
The speed with which SVB collapsed stunned analysts. The bank was closed on Friday morning; Typically, regulators try to close down failing banks over the weekend and at the same time announce the sale of the banks’ assets, using the weekend to switch accounts.
– Berber Zin contributed to this article.
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