US authorities act decisively to protect SVB’s and other banks’ deposits

On Sunday, US authorities announced a series of measures to reassure private individuals and businesses of the national banking system’s soundness, and will notably guarantee withdrawals for all deposits from the bankrupt Silicon Valley Bank (SVB).

In addition to SVB, the authorities will allow access to all deposits at another credit institution, Signature Bank, which was shut down by the regulator, to widespread surprise, according to an official statement.

The Federal Reserve (Fed) has also pledged to lend the necessary funds to other banks that may need to honour their clients’ withdrawal requests.

These measures were taken jointly by Treasury Secretary Janet Yellen, the Fed and the Federal Deposit Insurance Corporation (FDIC), after consulting with US President Joe Biden, according to a joint statement.

The whole intervention bears witness to the turmoil threatening the US banking system, disrupted by the Fed’s forcible efforts to tighten monetary policy.

The Fed’s measures have put pressure on banks’ margins, encouraged customers to invest their money in financial products that are more remunerative than current accounts, and have caused havoc in the cash-hungry digital tech sector.

The recent wave of withdrawals has caused three US banks to default this week. They are SVB, Signature Bank and Silvergate Bank, a smaller institution well-known for its preferential links with the cryptocurrency community.

New York-based Signature Bank is the 21st largest US bank, with assets estimated by the Fed at $110 billion as of the end of 2022.

US banking system resilient

Signature Bank’s default is the third largest in US history, behind SVB’s and that of Washington Mutual, in 2008.
“Today, we are taking decisive actions to protect the US economy by strengthening public confidence in our banking system,” said the Fed, the US Treasury and FDIC in their joint statement.

“This step will ensure that the US banking system continues to perform its vital roles of protecting deposits and providing access to credit for households and businesses,” they continued.

After the FDIC announced its takeover of SVB on Friday, many were worried about the fate of the deposits frozen by the bank's default.

Some 96% of them were not, in fact, covered by the habitual deposit guarantee, which insures up to $250,000 per customer per bank.

“The banking system is much more resilient and stands on a much better footing than before the financial crisis. To be clear, the situation is not that of 2008,” said a Treasury official.

“The Fed’s actions this weekend are designed to put an end to the disruptions to the banking sector and the financial system that have suddenly occurred in recent days,” said a Fed official.

The package of measures unveiled on Sunday was “necessary to address the systemic risk we have seen in the financial markets,” he added.

Biden 'to hold those responsible to account'

“I am firmly determined to hold to account those responsible for this mess,” said US President Joe Biden in a statement.

The measures announced on Sunday will protect account holders but “shareholders [in Signature Bank and SVB] and certain unsecured debt-holders will not be protected. Senior management has also been removed,” said the joint statement.

Biden has assured that “the American people and American companies can be confident that their bank deposits will be there when they need them.”

He is due to speak on Monday about “how we will preserve the banking system’s resilience in order to protect our historic economic recovery,” said Biden.

At the same time, the US authorities have put SVB up for sale, with the aim of finding a buyer as soon as possible.

The race against time in which the US authorities are engaged echoes the events of the weekend of September 13 and 14, 2008.

Then, the government failed to find a buyer for Lehman Brothers and eventually refused to intervene, forcing the bank to default on the Monday, with dramatic consequences for the financial sector and the economy as a whole.

Sunday's announcements were made a few minutes before the opening of the Tokyo Stock Exchange. At around 2.15 a.m. GMT on Monday, Tokyo was down 1.63%.

Besides being concerned about the banking system’s stability, many are worried about the repercussions of SVB's bankruptcy on the tech sector, both in the US and elsewhere.

SVB claimed that “nearly half” of the life sciences and technology start-ups financed by US investors ranked among its clients.

SVB deposits amounted to approximately $170 billion dollars, according to a document published by the bank last Wednesday, but huge withdrawals have been made since.

“Many depositors are small businesses that need access to their funds to pay their bills, and they employ tens of thousands of people [in the US]," said Yellen talking on CBS on Sunday.

Still on Sunday, Yellen ruled out rescuing SVB by means of an injection of public money.