Yellen Reassures as Regulators Race to Contain Silicon Valley Bank Fallout

Another idea being floated by analysts on Sunday was the possibility that the F.D.I.C. could find a way to pay back depositors. While the regulator is typically required to unravel failed banks in the cheapest way possible — which means leaving the private sector on the hook for losses on uninsured deposits — it can get around that using what is called a “systemic risk exception.”

The rule, which was used repeatedly during the 2008 crisis, essentially allows the government to pay back uninsured depositors if failing to do so would have serious adverse consequences for the economy or financial stability.

But invoking the exception requires jumping a number of hurdles: The Treasury secretary, in consultation with the president, the F.D.I.C., and the Federal Reserve Board, must sign off on the decision to use it.

“If the Fed signs off, I would think the Fed really sees it as systemic,” said Steven Kelly, a senior research associate at the Yale Program on Financial Stability, explaining that it was not clear that Silicon Valley Bank’s failure is in fact a threat to the stability of the broader financial system at this point. “They tend to take the determinations really seriously.”

And there are other steps that regulators could take to reassure investors in the safety of the system and prevent more sweeping bank runs, perhaps even if depositors at Silicon Valley Bank are not paid back in full.

“I think the more urgent task is to reassure uninsured depositors more broadly,” said Daleep Singh, chief global economist at PGIM Fixed Income and a former economic official from both the Biden administration and the New York Fed.

To do that, the Fed could also emphasize that banks can tap the Fed’s so-called discount window. That program allows commercial banks to take investment-grade securities — including Treasury bonds — and pledge them to the Fed in exchange for cash to meet short-term liquidity needs.

Article source: https://www.nytimes.com/2023/03/12/business/janet-yellen-silicon-valley-bank.html