Financial crisis: Alert after seizure of SVB and Signature banks

Deparment of the Treasury, the Federal Reserve and the FDIC issued a joint statement announcing that they will guarantee 100% of deposits and operate a special lending mechanism for banks.

The Deparment of the Treasury, Federal Reserve and Federal Deposit Insurance Corporation (FDIC), issued a statement on Sunday evening to announce a series of emergency measures designed to prevent the banking crisis being provoked by the seizure of the Silicon Valley Bank (SVB) from spreading. The statement was released after it became known that the Biden Administration had also taken control of Signature Bank, and in the face of growing fears around the world of a repeat global crisis like the one that led to the collapse of Lehman Brothers in 2008. U.S. financial officials dismissed the senior management and guaranteed 100% of the deposits of both banks. In addition, the Federal Reserve announced that it was making available additional funding to help the banking system.

The authorities were forced to put on a show of unity and strength following the collapse of Signature Bank, which is even larger ($209 billion in assets) than SVB ($110 billion), whose intervention last Thursday, spread fear and distrust throughout the global financial system over the weekend. The announcement came hours before the opening of markets in Asia, to prevent the confusion and fear of a second major bank collapse in less than a week from triggering a major crisis.

Avoiding a "systemic collapse".

In the statement, the authorities guaranteed the totality of the deposits. This means that, in these cases, they will cover amounts in excess of the $250,000 limit established by federal law. The decision was taken in an attempt to prevent the fears of savers in other banks from triggering a "systemic collapse." The measures announced also included the dismissal of senior management. Although the three agencies made it clear that "Shareholders and some unsecured debtors will not be protected," they are aware that they will face accusations of having bailed out the money of tech companies, wealthy Californians and private equity investors.

Today we are taking decisive actions to protect the U.S. economy by strengthening public confidence in our banking system. This step will ensure that the U.S. 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.

Taxpayers will not lose money

The press release stated that SVB customers will regain access to their money as of Monday, March 13 and insisted that "no losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer." This was also extended to Signature customers, with the same conditions.

Although succinctly announced in the joint statement, the Federal Reserve issued a second note elaborating on the special bank lending facility to minimize the impact of these failures. The central bank announced that "the DOT will make available up to $25 billion from the Exchange Stabilization Fund" to support the initiative, although the Fed "does not anticipate that it will be necessary to draw on these backstop funds."

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 in length to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. 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.

Consequences of interest rate hikes

Investments in government securities have lost value as a result of the Fed's interest rate hikes. The announcement that the original value of these securities will be taken into account and not the updated value is one of the most important measures to maintain the confidence of the financial system. In fact, this loss of value is one of the main causes of SVB's decline. According to the FDIC, at the end of last year, banks across the industry recorded losses of $620 billion.

In the case of Signature, one of the world's leading cryptocurrency banks, the cryptocurrency crisis has been one of the main reasons for its intervention. The bank developed an aggressive campaign to become the absolute leader in this market. To this end, they developed a customized payment system for cryptocurrency companies. The initiative appeared to be a success, as it enabled the bank to more than double its deposits in just two years. At the beginning of 2022, around 27% of its deposits came from clients with digital assets. It also has a large portfolio of organizations and start-ups dedicated to fighting climate change.

Biden calls for confidence in banks

President Biden posted a tweet following the release of the statement in which he said he was aware of the crisis group's progress in aborting the risks of widespread bank failures. "I am pleased that they have reached a solution that protects workers, small businesses, taxpayers and our financial system," the president said:

The American people and American businesses can be confident that their bank deposits will be there when they need them. I'm 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.