Tuesday, 21 March 2023

US Treasury promises full access to SVB deposits, no bailout

5 min read

By Foo Boon Ping

US financial regulators have announced damage-control measures for the Silicon Valley Bank crisis. Treasury Secretary Janet Yellen promised that there will be no taxpayer-funded bailout. SVB's undoing ranks just behind the largest bank failure in US history of Washington Mutual in 2008. New-York based Signature Bank was seized by the FDIC two days after SVB was shuttered.

As the fast-moving Silicon Valley Bank (SVB) liquidity crisis-induced resolution unfolds, US regulators have stepped in to assure depositors that they will have full access to their deposits on Monday, 13 March, in an overt attempt to avert market jitters and possible contagion as a new trading week commences.

A statement issued by secretary of The U.S. Department of the Treasury Janet L. Yellen, jointly with Federal Reserve Board (Fed) chair Jerome Powell, and Federal Deposit Insurance Corporation (FDIC) chairman Marty Gruenberg, said she had approved actions to enable "the FDIC to complete its resolution of Silicon Valley Bank, Santa Clara, California, in a manner that fully protects all depositors. Depositors will have access to their money starting Monday, 13 March. No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer".

It also announced a third bank, Signature Bank, which has built up a significant crypto asset portfolio over recent years and faced an apparent liquidity crunch as investors and depositors rush to exit the low-yielding and poorly performing assets, was shut down over the weekend.

This follows the voluntary closure of Silvergate Bank on 8 March which saw its crypto assets devalue following the FTX collapse and SVB on 10 March as its badly mismanaged asset liability books imploded.

In all cases, the failures were due largely to poor risk and asset-liability management that did not adequately recognise and mitigate the emerging liquidity risk. However, they were aided in no small part by recent aggressive Fed rates hikes, which caught out an industry lulled by almost one and a half decades of easy money.

The government and financial regulators said they have taken decisive actions to protect the US economy by strengthening public confidence in the banking system. "This step will ensure that the US banking system continues to perform its vital roles of protecting deposits and providing access to credit to households and businesses in a manner that promotes strong and sustainable economic growth," the statement read.

The Dodd-Frank Act instituted after the last global financial crisis (GFC), provides for the Orderly Liquidation Authority to allow the FDIC to manage the orderly failure of large financial institutions. The Dodd-Frank Act also requires large banking organisations, with total assets of at least $50 billion, and certain other firms to periodically submit resolution plans, or living wills, to the Fed and the FDIC. They must describe the strategy for rapid and orderly resolution in the event of material financial distress or failure, and include both public and confidential sections.

This is the first major test of post-GFC crisis regulation in the US and how it will stand up against emerging risks as the country faces tighter financial conditions. Will it have done enough to restore confidence and trust, and avert runs on other suspected liquidity-stressed institutions? Providing additional funding to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors is certainly a step in the right direction, and taking immediate public/transparent actions is the next.

Read the joint statement here

Keywords: Ftx, Trading, Federal Reserve, Deposits, Crypto
Institution: Silicon Valley Bank, US Department Of Treasury, Signature Bank
Country: United States
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