US regulators took unprecedented actions to restore faith in the financial system following the collapse of Silicon Valley Bank.
In response to the closure of New York’s Signature Bank and fears of potential spillover effects on other regional lenders and the wider economy, the Treasury Department, Federal Reserve, and Federal Deposit Insurance Corp. jointly announced several measures to mitigate the risks.
These measures included a new backstop for banks that was deemed sufficiently large to protect the nation’s deposits.
The FDIC also committed to resolving Silicon Valley Bank in a way that “fully protects all depositors.” At the same time, the Fed announced a new Bank Term Funding Program that provides one-year loans to banks on easier terms than usual. Additionally, the central bank relaxed lending terms through its discount window, its primary direct lending facility.
The regulators’ primary concern was to assure businesses and households that they would be fully compensated for their deposits to prevent further bank runs that could exacerbate the risk of a recession. The announcement drove up US stock futures and Treasuries, with the S&P 500 contracts up 1.5% in London.
In the UK, HSBC Holdings Plc announced the acquisition of the UK arm of Silicon Valley Bank following discussions between ministers and bankers on ways to avert the unit’s collapse. US Treasury Secretary Janet Yellen signalled aid for all depositors, including those whose accounts exceeded the $250,000 threshold for FDIC insurance.
US Authorities Protected Banking Collapse
The Fed’s new facility was established under its emergency authority, which allows for the creation of a broad-based program under “unusual and exigent circumstances” that requires approval from the Treasury. The new program provides loans of up to one year, with collateral valued at par, or 100 cents on the dollar, enabling banks to receive larger loans for securities worth less than that.
The US Federal Reserve has taken steps to shore up confidence in the financial system after the collapse of Silicon Valley Bank and Signature Bank. The Fed announced a new “Bank Term Funding Program” that offers one-year loans to banks with easier terms than usual.
The central bank also relaxed terms for lending through its discount window. The collapse of the two banks may test the Fed’s resolve as it decides on its next move on rates, with financial ructions potentially raising the bar for such a move.
Economists at JPMorgan Chase forecast a quarter-point rate hike in March, while counterparts at Goldman Sachs no longer expect a rate increase. SVB’s meltdown illustrates the costs of the Fed’s most aggressive monetary tightening campaign since the early 1980s, with the lender having invested money in longer-term bonds during the pandemic.
