Authorities raced on Sunday to stem jitters about the health of the nation's financial system, pledging to fully protect all depositors' money following the collapse of Silicon Valley Bank while also giving any banks squeezed for cash easier terms on short-term loans.
The Treasury Department, Federal Reserve and Federal Deposit Insurance Corp. jointly announced the efforts, aimed at strengthening confidence in the banking system after SVB's failure spurred worry about spillover effects.
Concerns spread Sunday when state regulators closed New York's Signature Bank.
Regulators acted swiftly on a number of fronts to contain the potential fallout:
- The FDIC said it will resolve SVB in a way that that "fully protects all depositors." Similarly, "all depositors" at Signature will be made whole.
- The Fed announced a new "Bank Term Funding Program" that offers one-year loans to banks under easier terms than it typically provides.
- The Fed also is relaxing terms for lending through its discount window, its main direct lending facility.
With a senior Treasury official cautioning there were other banks that appeared to be in similar situations to SVB and Signature, regulators' top concern was assuring business and household depositors were made whole on their deposits.
That may help avoid any additional bank runs that could heighten the risk of a recession, at a time when the Fed continues to raise interest rates to rein in inflation.
The steps taken by regulators to shore up the American financial sector drove U.S. stock futures and Treasuries higher in early trading Monday in Asia, as investors reacted to the moves.
Contracts on the S&P 500 were up 1.2% as of 10:02 a.m. in Tokyo. Bank stocks had plunged last week by the most since the March 2020 pandemic shock.
Other Issues
U.S. regulators emphasized that taxpayers won't be on the hook for protecting SVB and Signature deposits, and Treasury and Fed officials rejected the idea that the banks are being bailed out — showcasing the potential political sensitivities of the weekend moves.
The regulators said shareholders and certain unsecured debtholders will be wiped out, while management was fired.
President Joe Biden, in a statement Sunday night, said the solution "protects American workers and small businesses, and keeps our financial system safe."
For the Fed, the collapse of two powerhouse regional banks will test their resolve as they decide their next move on rates.
Chair Jerome Powell just last week opened the door to a re-acceleration to a 50 basis-point hike at the Fed's March 21-22 meeting. Financial ructions may raise the bar for such a move, however.
Costs of Tightening
More broadly, SVB's meltdown offered an illustration of the costs of the Fed's most aggressive tightening campaign since the early 1980s. The lender had plowed money into longer-term bonds, the market values of which dropped as yields soared.
Meantime, SVB's funding costs surged as the Fed kept jacking up its benchmark rate.
