Fed Reserve steps in to help depositors following SVB collapse

Customers of Silicon Valley Bank (SVB) and Signature Bank will be made whole despite the banks facing closure, it has been confirmed, after widespread financial disruption in the US over the weekend.

The second-largest bank collapse in the US’ history (after the Washington Mutual collapse in 2008) happened over the weekend, as commercial bank Silicon Valley Bank (SVB) was closed by the California Department of Financial Protection & Innovation on Friday (10 March) and subsequently entered receivership. 

SVB, part of the SVB Financial Group, is a commercial bank that was set up in 1983 to help individuals, investors, and “the world’s most innovative companies achieve their ambitious goals”.

It largely specialises in banking services for tech start-ups and venture capitalist banking and has a strong deposit base as well as US$209 billion ($313.5 billion) in assets. It was believed to be the 16th largest US bank at the time of its collapse.

However, as the American economy has been struggling with high inflation and high rates, SVB had been experiencing strong demand for deposit drawdowns from tech company customers.

Last week, the lender announced that it had sold approximately US$21 billion ($31.7 billion) of securities, resulting in an after-tax loss of approximately US$1.8 billion ($2.7 billion) in the first quarter of 2023.

The bank also moved to sell US$1.25 billion ($1.9 billion) of its common stock and $500 million ($754.5 million) of depositary shares to support its balance sheet.

Given the alarm this caused market, more customers began pulling funds from their deposits, exacerbating the issue.

According to a regulatory filing, more than US$42 billion of deposits were withdrawn from SVB on Thursday (9 March). 

On Friday (10 March), the Californian financial regulator moved to close the bank. 

The Federal Deposit Insurance Corporation (FDIC) has now been made receiver and created the Deposit Insurance National Bank of Santa Clara (DINB) to allow depositors access to their insured deposits and time to open accounts at other insured institutions.

While the US’ financial system protects up to $250,000 of deposits, there had been concerns for the future viability of the many tech start-ups that had more than this in their accounts.

However, the Federal Reserve, federal Treasury, and FDIC have now released a joint statement outlining that depositors will be able to access all their money. It is hoped that this will help “reduce stress across the financial system, support financial stability and minimise any impact on businesses, households, taxpayers, and the broader economy”.

The statement read: “After receiving a recommendation from the boards of the FDIC and the Federal Reserve, and consulting with the President [Joe Biden], Secretary Yellen approved actions enabling the FDIC to complete its resolution of Silicon Valley Bank, Santa Clara, California, in a manner that fully protects all depositors. 

“Depositors will have access to all of their money starting Monday, March 13. 

“No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer.”

After New York-based Signature Bank was shut by its local regulator to contain the spreading banking crisis, the Federal Reserve and regulators announced that they were making a similar systemic risk exception for Signature Bank.

“All depositors of this institution will be made whole. As with the resolution of Silicon Valley Bank, no losses will be borne by the taxpayer,” the statement read.

The Federal Reserve Board has also announced that it will make available additional funding to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors.

“This action will bolster the capacity of the banking system to safeguard deposits and ensure the ongoing provision of money and credit to the economy,” it said.

The additional funding will be made available through the creation of a new Bank Term Funding Program (BTFP), offering loans of up to one year to banks, savings associations, credit unions, and other eligible depository institutions pledging US Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. These assets will be valued at par. 

The BTFP will be “an additional source of liquidity against high-quality securities, eliminating an institution’s need to quickly sell those securities in times of stress”.

With approval of the Treasury secretary, the Department of the Treasury will make available up to $25 billion from the Exchange Stabilization Fund as a backstop for the BTFP, it added, but flagged that it does not expect to have to draw on these.

US President Joe Biden stated: “Over the weekend, and at my direction, the Treasury Secretary and my National Economic Council Director worked diligently with the banking regulators to address problems at Silicon Valley Bank and Signature Bank. 

“I am pleased that they reached a prompt solution that protects American workers and small businesses, and keeps our financial system safe. The solution also ensures that taxpayer dollars are not put at risk.

“The American people and American businesses can have confidence that their bank deposits will be there when they need them.

“I am firmly committed to holding those responsible for this mess fully accountable and to continuing our efforts to strengthen oversight and regulation of larger banks so that we are not in this position again.”

Impact in Australia

Given the close relationship between the US economy and other developed nations, including Australia, stock markets were generally trading lower over the last few days.

The S&P/ASX 200 closed lower on Monday (13 March), for example, dropping 35.90 points or 0.50 per cent to 7,108.80 and setting a new 20-day low. The index has lost 3.00 per cent for the last five days but is virtually unchanged over the last year to date.

Noting the financial furore over the weekend, Australia’s federal Treasurer Jim Chalmers said: “We are closely monitoring the situation and potential impacts for Australia caused by the collapse of the Silicon Valley Bank in the US.

“In seeking preliminary advice we are aware that some Australian firms have been impacted and we’re working closely with our regulators as well as the tech sector to better understand the implications for the industry as the situation evolves. 

“Australians should be reassured that our institutions are solid, our banking sector is well-capitalised, and we’re in a better position than most other nations to deal with the challenges we face in the global economy.”

[Related: Mortgage stress hits 10-year high: Roy Morgan]