US regulators unveiled emergency measures on Sunday to shore up the banking system and took control of another bank, as they moved to stem contagion from the implosion of Silicon Valley Bank.
The Federal Reserve announced a new lending facility aimed at providing additional funding to eligible depository institutions to ensure that “banks have the ability to meet the needs of all their depositors”. In a statement, the US central bank added it was “prepared to address any liquidity pressures that may arise”.
The facility is part of a broader effort by regulators, including Treasury secretary Janet Yellen, Fed chair Jay Powell and Martin Gruenberg of the Federal Deposit Insurance Corporation, to reassure customers that their money is safe.
The Fed’s new facility, the Bank Term Funding Program (BTFP), will offer loans of up to one year to lenders who pledge as collateral US Treasuries, agency debt, mortgage-backed securities and other “qualifying assets”.
Those assets will be valued at par and the BTFP will “eliminat[e] an institution’s need to quickly sell those securities in times of stress”, the central bank said. The facility would be big enough to cover all US uninsured deposits, the Fed said. The discount window, where banks can access funding at a slight penalty, remains “open and available”, the central bank added.
The regulators also affirmed that all depositors of Silicon Valley Bank would have access to their money on Monday, as would those of Signature Bank, which had been closed by the New York Department of Financial Services before being placed under FDIC control and marketed for sale.
A number of venture capitalists said Signature was the most exposed lender after SVB because it also had a concentrated customer base, significant exposure to cryptocurrencies and technology companies and a high proportion of uninsured deposits. Although it was based in New York, it had expanded to California.
Ninety per cent of Signature’s $89bn deposits were not insured by the FDIC at the end of last year, according to a regulatory filing. That is the highest proportion among the banks whose shares were halted last Friday for volatile trading. Its share price fell 37 per cent last week. Roughly a fifth of its total deposits were digital assets deposits as of December 31.
After the crypto market crash last year, the bank began to reduce its digital asset banking deposits and raised its borrowings from the Federal Home Loan Bank of New York by $8.6bn to $12bn to help it through the crypto market downturn.
Officials on Sunday said that no losses stemming from the resolution of either SVB or Signature’s deposits would be borne by the taxpayer. Any shortfall would be funded by a levy on the rest of the banking system. They added shareholders and certain unsecured debtholders would not be protected.
In a statement on Sunday, Gary Gensler, chair of the Securities and Exchange Commission, vowed to “investigate and bring enforcement actions” in the event of violations to federal securities law.
“In times of increased volatility and uncertainty, we at the SEC are particularly focused on monitoring for market stability and identifying and prosecuting any form of misconduct that might threaten investors, capital formation, or the markets more broadly,” he said.
A senior US Treasury official told reporters on Sunday that Yellen had consulted with Joe Biden, the US president, before signing off on the plan to invoke a “systemic risk exception”, allowing all depositors of SVB and Signature to gain access to their money on Monday morning. In terms of SVB, there had not been enough time for a buyer to emerge and complete a successful auction.
The senior US Treasury official denied that the move to make uninsured deposits whole at the two institutions represented a bailout because shareholders and bondholders at the two banks had been “wiped out”. The official also said the “economy remains in good shape” and the financial system rested on a much more solid “foundation” than it had in 2008.
Anat Admati, a finance professor who is an expert on banking regulation at Stanford University, said regulators over the past few years have allowed the banking system to get fragile again, so they had no choice but to bail out Silicon Valley Bank. “When it gets to this point and you are in a hostage situation, there is nothing else you can do,” says Admati. “But there is no other word for this other than to call it a bailout.
The move underscored US regulators concerns’ about potential spillovers, which motivated the establishment of the Fed facility to help shore up other potentially troubled banks and prevent other bank runs. The senior US Treasury official said they saw “similarities” in the situations at some of SVB and Signature’s peers and wanted to ensure depositors would not withdraw suddenly.
The chance of SVB or Signature Bank — leading lenders for the start-up community and cryptocurrency industry — being acquired by a rival bank was unlikely as all the potential buyers have so far walked away, said people with direct knowledge of the negotiations and who have been working with SVB and the US government.
PNC, a large US bank, and Canada’s RBC were invited to buy SVB, but they decided against bidding as the economics of the deal would have made little sense, said people with direct knowledge of the matter.
America’s five largest banks, including JPMorgan and Bank of America, are also not going to be buyers, these people said.
For a transaction to make sense for any buyer, the US government would be required to cover part of their losses, said a person working with the ailing California-based bank. However, that person said the government had made it clear it did not intend to transfer any taxpayer money to bail out SVB.
Separately, New York-based investment bank Centerview Partners has been hired to sell assets not related to customers’ deposits, including its investment bank and capital business, said people with direct knowledge of the matter.
Additional reporting by Joshua Franklin and Stephen Gandel in New York, Stefania Palma in Washington and George Hammond in San Francisco