By Andrea Shalal, Howard Schneider and Pete Schroeder
WASHINGTON/SINGAPORE (RockedBuzz via Reuters) – U.S. authorities launched emergency measures on Sunday to boost confidence in the banking system after the failure of Silicon Valley Bank threatened to trigger a broader financial crisis.
After a dramatic weekend, regulators said customers of the bankrupt bank will have access to all their deposits from Monday and set up a new structure for banks to access emergency funds. The Federal Reserve has also made it easier for banks to borrow from it in an emergency.
While the measures provided some relief to Silicon Valley companies and global markets on Monday, concerns remain about broader banking risks and have raised questions about whether the Fed will stick to its plan of aggressive interest rate hikes.
“We think the steps taken by the Fed, the Treasury and (the Federal Deposit Insurance Corp) will decisively break the psychological ‘double loop’ in the regional banking sector,” said Karl Schamotta, chief market strategist at Corpay in Toronto.
“But, fair or not, the episode will contribute to higher levels of underlying volatility, with investors wary of more cracks emerging as Fed policy tightening continues.”
Regulators also moved quickly to shut down Signature Bank of New York, which had come under pressure in recent days.
Broader efforts to avert a crisis lifted Wall Street stock futures in Asian trading on Monday, helping broader markets.
Persistent concerns over the financial sector weighed on banking stocks in Asia, with Japan’s Mitsubishi UFJ hitting a two-month low and Singapore’s DBS a four-month low. Hong Kong shares of HSBC and Standard Chartered trimmed early losses to trade nearly unchanged.
European equity markets fell 0.6% in early trading, while banking stocks fell just over 1%. US stock futures were higher. Asian stocks outside Japan rose more than 1%, while blue-chip Nikkei tumbled 1%.
The Biden administration’s intervention underlines how a relentless campaign by the Fed and other major central banks to fight inflation is putting pressure on the financial system and global markets.
Silicon Valley Bank (SVB), a mainstay of the startup economy, was a product of the decade-long era of cheap money, with unique risks that made it particularly vulnerable. But when a run on banks ensued last week, concerns that other regional banks shared similarities quickly spread.
With the Fed poised to continue hiking rates, investors said the financial system might not be completely out of the woods just yet.
Goldman Sachs analysts said they no longer expect the Fed to raise rates by 25 basis points at its next policy meeting on March 21-22 amid stress in the banking sector.
“What investors need to expect tomorrow and beyond is that we will be dealing with a lot of event risk,” said Michael Purves, chief executive officer of Tallbacken Capital Advisors. “There will still be lingering questions with other regional banks.”
PROTECTED DEPOSITORS
The collapse of SVB – the largest bank failure since 2008 – sparked concerns that small business customers would be able to pay their own staff, with the FDIC only protecting deposits up to $250,000.
According to the FDIC, approximately 89% of SVB’s $175 billion deposits were uninsured at the end of 2022.
All depositors, including those whose funds exceed the government-insured maximum level, will be compensated, according to a joint statement by US Treasury Secretary Janet Yellen, Fed Chair Jerome Powell and Federal Deposit Insurance Corp Chairman Martin Gruenberg Sunday evening.
A senior US Treasury official said the actions taken would protect depositors while providing further support to the broader banking system, but officials and regulators continue to monitor the stability of the financial system.
“Companies are not bailed out. Depositors are being protected,” the official said.
The risk would be borne by the Deposit Insurance Fund, which has sufficient funds to do so.
Providing the systemic risk exceptions was deemed quicker than waiting for a potential buyer, the official said.
‘DELETED’
Treasury officials said depositors at New York’s Signature Bank, which was shut down by the New York state financial regulator on Sunday, would also be remedied without any loss to the taxpayer.
Signature, like SVB, had a concentrated clientele in the technology sector and the securities on its balance sheet had eroded as interest rates rose. In September, nearly a quarter of Signature’s deposits came from the cryptocurrency sector, but the bank announced in December that it would reduce its cryptocurrency-related deposits by $8 billion.
While all customer deposits will be protected, new policies adopted on Sunday will “wipe out” equities and bondholders in SVB and Signature Bank, a senior US Treasury official said.
Coupled with the Fed’s decision to ensure financial institutions can meet the needs of all their depositors, the steps would “restore market confidence,” the official said.
Fed Funds futures rose on Monday to imply just a 17% chance of a half-point rate hike by the Federal Reserve when it meets next week, well below the 70% before the SVB news broke last week.
Chart: GRAPHIC-Total Deposits in US Banking System- https://www.ceiving.com/graphics/USA-ECONOMY/DEPOSITS/byprlqgrgpe/chart.png
The Fed said it will make additional funding available through a new Bank Term Funding Program, which will offer loans for up to a year to depository institutions, backed by Treasuries and other assets held by these institutions.
When the coronavirus pandemic triggered financial panic in March 2020, the Fed announced a series of measures to keep credit flowing by reducing borrowing costs and lengthening the terms of direct loans. By the end of that month, utilization of the Fed’s discount window had risen to over $50 billion.
Until the middle of last week, before the SVB crash, there were no indications of a recovery in usage, with Fed data showing outstanding weekly balances of $4 billion to $5 billion year-to-date. .
UNITED KINGDOM FALLOUT
In Britain, where SVB has a branch, the government and the Bank of England held talks over the weekend to find a solution that avoids bankruptcy of the local lender.
In a move reminiscent of the financial crisis era, HSBC announced early Monday in London that it would buy Silicon Valley Bank UK for £1 ($1.21). It said the subsidiary had loans of around £5.5 billion and deposits of around £6.7 billion as of 10 March.
Although SVB UK is small – HSBC’s balance sheet exceeds $2.9 trillion – concerns that SVB’s bankruptcy would cause UK start-up industry to freeze had prompted the sector to seek government intervention.
UK venture capital-backed start-ups have around £2.5bn, much of it in deposits, “locked up” in SVB UK, according to a weekend survey by an industry body, seen by RockedBuzz via Reuters.
Chart: The Discount Window – https://www.ceiving.com/graphics/USA-FED/DISCOUNT/zjvqjyrwwpx/chart.png
($1 = 0.8256 pounds)
(Reporting by Lananh Nguyen, Paritosh Bansal, Tatiana Bautzer, Nupur Anand, Ira Iosebashvili and Dan Burns in New York, and Pete Schroeder, Jason Lange, Sarah N. Lynch, Rami Ayyub, David Morgan and Andrea Shalal in Washington, Kanjyik Ghosh and Akanksha Khushi in Bangalore and Andrew MacAskill, William Schomberg, Amy-Jo Crowley and Pablo Mayo in London; Screenplay by Megan Davies, Alexander Smith, Leslie Adler, Simon Lewis and Vidya Ranganathan; Editing by Deepa Babington, Heather Timmons, Diane Craft, Leslie ; Adler, Sam Holmes, Elisa Martinuzzi and Catherine Evans)
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