–Fed ‘To Take Additional Steps As Appropriate’
–‘All Depositors’ Now Protected
–New Question of Rescue Episode’s Impact on Fed Rate Decisions
By Denny Gulino
WASHINGTON (MaceNews) – A wave of severe weekend anxiety about paychecks and savings that swept across America appeared to fade with the hastily assembled government rescue program as a new week begins.
The Federal Deposit Insurance Corporation, the Federal Reserve and the U.S. Treasury, surprised by the implosion of a West Coast bank that had accumulated deposits of thousands of firms across the country, opened their financial crisis playbook to create a backup fund to add insurance to the uninsured.
The Silicon Valley Bank was much more than a regional institution when its California regulator and the FDIC made the unusual daytime seizure Friday. By Sunday night another bank, the smaller crypto-oriented Signature Bank of New York, had been closed as well.
As part of the rescue, a third bank, San Francisco’s First Republic Bank, was given $70 billion in backup liquidity by the Fed and JP Morgan.
With more than $150 billion in uninsured deposits at risk, all locked away in the sudden receivership, reports of imperiled businesses and individuals erupted coast to coast. From Etsy and Pinterest artisans denied payments to the Camp Toy chain with a Manhattan showcase location, notices went out that suddenly there was no money to distribute.
As the storm clouds multiplied and the scope of the fallout from Friday’s closure became more and more evident, the regulators were working to cauterize the wound to the financial system. Sunday evening the Fed, FDIC and Treasury came through with the relief that, although widely anticipated, was not certain until 6:15 p.m. ET.
Help was on the way, they said, “in a manner that protects all depositors.” With the word “all” the crisis seemed to have been resolved yet there is expected to be ongoing intense scrutiny for any additional ripple effects, like continuing pressure to withdraw deposits from smaller banks.
The regulators’ announcement cut through the muddled accounts on TV networks in which interviewers kept asking whether Silicon Valley Bank should get a “bailout,” as if that was still a possibility after the institution was taken out of existence by regulators on Friday.
Instead, the joint statement made clear, “Shareholders and certain unsecured debtholders will not be protected. Senior management has also been removed.”
The banking industry’s Deposit Insurance Fund will make the uninsured depositors whole, buttressed by a new Fed facility, the Bank Term Funding Program with a $25 billion backup from Treasury’s seldom used Exchange Stabilization Fund intended for foreign exchange adjustments. In addition, the Fed liberalized existing borrowing facilities for banks, savings and loans and credit unions. Institution collateral will be valued at par, not marked to market.
Perhaps most important, the Fed issued a promise to do whatever is necessary to take up the slack if the ringfencing of SVB and Signature proves to be less than entirely effective.
The additional sources of liquidity and a more accessible discount window facility will be enhanced as necessary as the Fed “is prepared to use its full range of tools to support households and businesses and will take additional steps as appropriate.”
Why Silicon Valley Bank management stayed oblivious to rising interest rates that depreciated its bond holdings, why bank examiners didn’t take note of its skyrocketing deposit base and why ratings firms didn’t sound the alarm sooner will be grist for much second-guessing in the weeks and months ahead.
Two and a half hours after the regulators stepped in with their rescue, the White House issued a statement in which President Biden blessed the new arrangements. “I am pleased that they reached a prompt solution that protects American workers and small businesses and keeps our financial system safe.”
He added, “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.” The statement was issued as the president was in a motorcade returning from Wilmington to the White House from from Joint Base Andrews.
Fedwatchers will be talking about how the dramatic rescue episode could alter the path of the Fed’s interest rate actions which just days ago had been speculated to include a return later this month to a rate hike again as large as 50 basis points.
As Asian markets opened early Monday the yield on the US benchmark 10-year note gyrated in a narrow range after having plunged Thursday and Friday by the most since the financial crisis.
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Contact this reporter: denny@macenews.com
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