13 Mar 2023

US announces it will stem Silicon Valley Bank fallout, customers to have deposit access

12:44 pm on 13 March 2023
People line up outside the shuttered Silicon Valley Bank (SVB) headquarters on 10 March, 2023 in Santa Clara, California.

People line up outside the closed Silicon Valley Bank (SVB) headquarters in Santa Clara, California. Photo: AFP / Getty Images

Silicon Valley Bank customers will have access to their deposits starting on Monday, US officials said, as the federal government announced actions to shore up deposits and stem any broader financial fallout from the sudden collapse of the tech startup-focused lender.

The boards of the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve, in consultation with President Joe Biden, approved the FDIC's resolution of SVB, according to a joint statement from US Treasury Secretary Janet Yellen, Fed Chair Jerome Powell and FDIC Chairman Martin Gruenberg on Sunday evening.

The move will not lead to losses by American taxpayers and all deposits will be made whole, the statement said.

"Today we are taking decisive actions to protect the US economy by strengthening public confidence in our banking system," the statement said.

"This step will ensure that the US banking system continues to perform its vital roles of protecting deposits and providing access to credit to households and businesses in a manner that promotes strong and sustainable economic growth."

The Federal Reserve also said it would make additional funding available through a new Bank Term Funding Program, which would offer loans up to one year to depository institutions, backed by Treasuries and other assets these institutions hold.

The officials also said depositors of New York's Signature Bank, which was closed Sunday by the New York state financial regulator, would be made whole at no loss to the taxpayer.

Signature's shareholders and unsecured debtors will not be protected, and management has been removed, the officials said.

Earlier, Yellen had said she was working with banking regulators to respond after SVB became the largest bank to fail since the 2008 financial crisis.

In March 2020 when the coronavirus pandemic and lockdowns triggered financial panic, the Federal Reserve announced a series of measures to keep credit flowing by lowering borrowing costs and lengthening the terms of its direct loans.

By the end of that month, use of the Fed's discount window facility shot up to more than US$50 billion.

Through the middle of last week, before SVB's collapse, there had been no indications of usage picking up, with Fed data showing weekly outstanding balances of $4 billion to $5 billion since the start of the year.

A worker (centre) tells people that the Silicon Valley Bank (SVB) headquarters is closed on 10 March, 2023 in Santa Clara, California.

A worker (centre) tells people the Silicon Valley Bank (SVB) headquarters is closed. Photo: Justin Sullivan / Getty Images / AFP

Finding a buyer

Although the Federal Deposit Insurance Corporation (FDIC) protects deposits of up to US$250,000, there have been worries about SVB deposits above that level, one source said, adding that many smaller businesses were at risk of being unable to pay staff.

And amid increased withdrawals from other regional banks, US officials are also keeping close watch on the wider sector.

More than 3,500 CEOs and founders representing some 220,000 workers have signed a petition started by Y Combinator appealing directly to Yellen and others to backstop depositors, warning that more than 100,000 jobs could be at risk.

With US$209 billion in assets, the Santa Clara, California-based lender was the 16th largest U.S. bank, making the list of potential buyers who could pull off a deal relatively short.

The FDIC, which was appointed receiver, was trying to find another bank willing to merge with SVB, people familiar with the matter said on Friday.

Some industry executives said such a deal would be sizeable for any bank and would likely require regulators to give special guarantees and make other allowances.

US House of Representatives Speaker Kevin McCarthy told Fox News' Sunday Morning Futures program that President Joe Biden's administration and the U.S. Federal Reserve were working to come up with announcement before markets open on Monday.

The Fed and FDIC did not immediately respond to a request for comment.

Community banks

Some analysts and prominent investors warned that without a resolution by Monday, other banks could come under pressure.

The Fed and the FDIC were weighing the creation of a fund that would allow regulators to backstop more deposits at banks that run into trouble, Bloomberg reported.

Regulators discussed a new special vehicle in conversations with banking executives and hoped such a measure would reassure depositors and help contain any panic, the report said.

"The good news is it is unlikely an SVB-style bankruptcy will extend to the large banks," risk and financial advisory firm Kroll said in a research note.

But small community banks could face issues and the risk is "much higher if uninsured depositors of SVB aren't made whole and have to take a haircut on their deposits," Kroll added.

Billionaire hedge fund manager Bill Ackman said in a tweet on Saturday that failure to protect all depositors could lead to the withdrawal of uninsured deposits from other institutions.

"These withdrawals will drain liquidity from community, regional and other banks and begin the destruction of these important institutions," Ackman, who said he does not have direct exposure, warned.

The S&P 500 regional banks index dropped 4.3 percent on Friday to end the week down 18 percent, its worst week since 2009.

Signature Bank dropped about 23 percent, while San Francisco-based First Republic Bank fell 15 percent. Western Alliance Bancorp dropped 21 percent and PacWest Bancorp slid 38 percent. Charles Schwab fell more than 11 percent.

Signature Bank, First Republic Bank, PacWest Bank and Charles Schwab did not immediately respond to requests for comment. Western Alliance Bank declined to comment.

Some banks could look to preemptively raise capital to fortify their balance sheets or try to strike deals of their own, industry executives said.

When IndyMac and Washington Mutual collapsed in 2008, the FDIC found other firms to take on the assets and keep deposits intact. If no buyer is found for SVB, uninsured depositors will probably be left with a portion of whatever funds the FDIC can raise selling off the bank's assets.

In Britain, where SVB has a local subsidiary, finance minister Jeremy Hunt said on Sunday he was working with Prime Minister Rishi Sunak and the Bank of England to "avoid or minimise damage" resulting from the chaos.

"We will bring forward very soon plans to make sure people are able to meet their cash flow requirements to pay their staff," Hunt told Sky News.

More than 250 British tech firm executives signed a letter on Saturday calling for government intervention, a copy seen by Reuters shows.

Advisory firm Rothschild & Co is exploring options for Silicon Valley Bank UK Limited, two people familiar with the talks told Reuters on Saturday. The BoE has said it is seeking a court order to place the UK arm into an insolvency procedure.

- Reuters