The United States Banking regulators have announced plans to backstop depositors with money at Silicon Valley Bank (SVB), which is seen as a critical step in stopping a feared systemic panic triggered by the collapse of the tech-focused institution.
This means depositors at both failed SVB and Signature Bank in New York, which was also shut down due to similar contagion fears, will have full access to their deposits as part of multiple moves that officials have approved over the weekend. Signature Bank had been a popular funding source for cryptocurrency companies.
Reports indicate over 90% of Signature Bank and SVB customers are uninsured.
In an attempt to fully protect depositors, the Treasury Department designated both SVB and Signature as systemic risks, which gives it the power to unwind both institutions. The Federal Deposit Insurance Corporation’s (FDIC) deposit insurance fund will be used to cover depositors, many of whom were uninsured due to the $250,000 cap on guaranteed deposits.
What the Federal Reserve is saying
Federal Reserve Chair Jerome Powell, Treasury Secretary Janet Yellen, and FDIC Chair Martin Gruenberg said in a joint statement,
- “Today we are taking decisive actions to protect the US economy by strengthening public confidence in our banking system.”
- “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. The Federal Reserve is prepared to address any liquidity pressures that may arise.”
Shareholders and some unsecured creditors will not be protected and will lose all of their investments.
- “This should be enough to stop any contagion from spreading and taking down more banks, which can happen in the blink of an eye in the digital age,” said Paul Ashworth, chief North America economist at Capital Economics. “But contagion has always been more about irrational fear, so we would stress that there is no guarantee this will work.”
The Fed’s new funding program offers more favorable terms than its discount window, with a longer duration of loans of one year instead of 90 days. Securities will be valued at par value rather than the market value assessed at the discount window.
According to officials on Sunday, the resolution of either SVB or Signature’s deposits will not result in any losses being absorbed by taxpayers. Any shortfall will be financed by imposing a levy on the rest of the banking system. They also stated that shareholders and particular unsecured debtholders will not receive any protection.
How Nigeria’s CBN deals with failed banks
This is similar to what the central bank of Nigeria does with AMCON, where all banks pay a levy towards banking resolution.
The approach to bailout both banks is similar to the model used by Nigeria’s central bank in recent years in bailing out banks that have failed in a similar manner. However, in the case of Nigeria, the central banks step into the bank by injecting capital and guaranteeing customer deposits. T
he US Fed did mention tax-payers money will not be used to bail anyone out suggesting funding will come from the sale of the bank’s asset. However, this will require temporary funding which is similar to what CBN does.
Also, in the case of Nigeria, shareholders of the banks are completely wiped out in this process as AMCON takes over the bank. The bank is midwifed by a new set of managers appointed by the central bank until it is sold.
More US action
The Federal Reserve is also creating a new Bank Term Funding Program aimed at safeguarding institutions affected by the market instability of the SVB failure. The program will offer loans of up to one year to banks, savings associations, credit unions, and other institutions.
Those taking advantage of the facility will be asked to pledge high-quality collateral such as Treasuries, agency debt, and mortgage-backed securities.
The program is expected to avoid situations where banks are forced to sell securities to cover shortfalls giving them enough time to sell the securities properly instead of a firesale. The facility will be backstopped by the Treasury, which put up $25 billion. According to the US FED, “the discount window, where banks can access funding at a slight penalty, remained “open and available.”.