Regulators Race to Contain Silicon Valley Bank Fallout and Close Signature Bank

The agencies said that “any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law.”

The Fed’s new lending program — backed by $25 billion in cash from a pot of money at the Treasury — will offer up to one-year loans to banks, savings associations, credit unions and other eligible depository institutions in exchange for collateral including U.S. Treasuries, agency debt and mortgage-backed securities.

The program will provide a workaround to financial institutions that have seen the market value of their long-term asset holdings fall as interest rates have risen. While many banks, like Silicon Valley Bank, are sitting on big “unrealized losses” because of the shift in rates over the past year, they will be able to borrow against the original value of their asset holdings at the Fed. That will give them bigger cash infusions, and prevent them from having to sell in desperation.

The sweeping measures underscored how dire officials worried the situation could become. The actions suggested that the government had become worried that the cracks that surfaced at Silicon Valley Bank earlier this week — ones that tied back to a recent and rapid rise in interest rates as the Fed fights inflation — could morph into a systemwide crisis if not halted with dramatic action.

The Treasury official said that regulators believed other “peer” banks could were poised to face similar outflows of deposits, the Treasury official said, but hoped that the new facility will reduce the chances of runs on otherwise healthy financial institutions.

The moves “demonstrate our commitment to take the necessary steps to ensure that depositors’ savings remain safe,” the agencies said in their joint statement.

Signature Bank’s failure — which was newly unveiled in the Sunday announcement — occurred quickly and surprised insiders, according to a person familiar with the matter. Signature had long specialized in providing banking services to law firms, providing everything from cash management services to escrow accounts for holding client money.

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