In response to the sudden collapse of Silicon Valley Bank (SVB), U.S. regulators have taken control of Signature Bank and announced emergency measures to calm depositors’ fears of pulling their money from smaller lenders.
The joint effort by the Treasury Department, Federal Reserve, and Federal Deposit Insurance Corp includes guaranteeing all deposits of SVB to restore confidence in the banking system. While the steps taken by regulators are intended to prevent a bank run, they do not constitute a bailout, as stock and bondholders in SVB and Signature will not be protected.
Officials have also designated SVB and Signature Bank as a systemic risk to the financial system, giving regulators flexibility to guarantee uninsured deposits. The government’s bank-deposit insurance fund will cover all deposits at both banks, rather than the standard $250,000, with any losses recovered in a special assessment on banks to prevent taxpayers from bearing any losses.
The Fed has also announced a new “Bank Term Funding Program,” offering loans of up to one year to banks pledging U.S. Treasury securities, mortgage-backed securities, and other collateral to prevent liquidation of securities and take losses to raise cash.
The program, backed by up to $25 billion from the Treasury’s exchange-stabilization fund, has come under criticism for offering a backdoor subsidy to bank investors and management. Sunday’s announcement concludes a hectic weekend where regulators auctioned off SVB after struggling to find a buyer, pivoting to backstop the deposits.
Federal Reserve’s Response To The Banking Crisis
In response to the crisis, the Federal Reserve has taken measures to soothe nerves about access to uninsured bank deposits, allowing it to stay focused on combating inflation by raising interest rates.
The failures of Signature Bank and Silicon Valley Bank have also highlighted the risks associated with banks’ exposure to cryptocurrency. Signature Bank, in particular, was one of a handful of banks that went big on crypto, providing accounts and other services to crypto startups and big investors in digital assets.
This focus on cryptocurrency, coupled with a bespoke payments system for crypto companies, helped the bank more than double deposits in two years. However, as the market for cryptocurrency experienced a rout, the bank’s exposure to crypto became a problem, draining billions of dollars in deposits.
The recent failures of Signature Bank and Silicon Valley Bank have raised concerns about the stability of the U.S. banking system, particularly regarding the increasing exposure of banks to the cryptocurrency market. These failures also pose a challenge for regulators, who must balance their desire to prevent wider financial contagion while avoiding the political fallout of bailing out financial institutions at taxpayers’ expense.
The bank invested much of that cash in longer-dated securities, whose values have fallen as interest rates have shot up, putting it at risk of larger losses if it had to liquidate its securities portfolio. Additionally, its depositors were heavily concentrated in the tight-knit world of startups and venture-capital firms, leaving the bank uniquely vulnerable to a run.
