The US government stepped in on Sunday with a series of emergency measures to stem the fallout across its banks following the failure of Silicon Valley Bank, assuring depositors that they would be able to recover all of their money.
The announcement by the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) came before the start of trading on Monday, amid fears of a contagion effect from the California-based bank as another lender, Signature Bank, was closed.
“Today we are taking decisive actions to protect the US economy by strengthening public confidence in our banking system,” the three entities said.
“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.”
Nasdaq 100 futures rose by 2 per cent following the announcement.
SVB was the 16th largest US bank and had approximately $209 billion in total assets, with about $175.4 billion in total deposits.
The bank, a lender to start-ups and venture capital firms, collapsed after it sold about $22 billion in long-term bonds, whose prices had dropped amid monetary tightening by the Fed.
Instead of being able to raise funds it needed from the bond sale to cover withdrawals, SVB incurred a $1.8 billion loss and then tried to plug the gap by raising capital.
US regulators then rushed to seize the assets of SVB on Friday after a run on the bank.
SVB's collapse is the second largest in US history after the closure of Washington Mutual in 2008, which was triggered by the global financial crisis.
US Treasury Secretary Janet Yellen approved Sunday's actions, which enable the FDIC to complete its resolution of SVB “in a manner that fully protects all depositors” upon the recommendation from the boards of the FDIC and the Fed, and consulting with President Joe Biden, the entities said.
Depositors will have access to all of their money from Monday, and no losses associated with the winding down of SVB will be borne by the taxpayer.
The three entities also said similar measures were being followed pertaining to New York's Signature Bank, which was shut down on Sunday by its state chartering authority.
As is the case with SVB, all depositors will be "made whole" and no losses will be borne by the taxpayer.
Shareholders and certain unsecured debt holders will not be protected and senior management at the lenders have been removed, the entities said.
“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 organisations said.
As part of the emergency measures, the Fed will make available additional funding to eligible depository institutions to give an assurance that banks have the ability to meet the needs of all their depositors.
The US banking system “remains resilient and on a solid foundation”, owing to reforms that were made after the 2008 financial crisis that ensured better protections for the banking industry, the entities said.
“Those reforms, combined with today's actions, demonstrate our commitment to take the necessary steps to ensure that depositors' savings remain safe.”
On Monday, HSBC bought the UK arm of SVB for £1 ($1.2). SVB UK had loans of around £5.5 billion and deposits of about £6.7 billion.
The banking crisis is expected to change the direction of the Fed's monetary policy.
The US central bank started raising interest rates in March 20222 to slash inflation, which soared to a 40-year high last year, and resorted to a series of 75 basis point and 50 bps increases last year.
Before the latest banking crisis, the Fed was widely expected to increase rates by 50 bps at its next meeting on March 21 and March 22, but that may no longer be the case, according to analysts.
“The bank crisis will be sitting in the headlines, as solutions and possible contagion beyond the banking sector and beyond the US borders will be on the menu of the week,” said Ipek Ozkardeskaya, a senior analyst at Swissquote Bank.
“The latter will likely interfere with Fed rate hike expectations … the Fed may want to think twice before stepping on the gas this month. So, it is well possible that the Fed may simply forget about a 50 bps hike this month or may not hike at all.”
The Fed cannot ignore issues caused by the steep interest rate increases in the banking sector and cannot afford to trigger a financial crisis to bring inflation back to its 2 per cent target rate, Ms Ozkardeskaya said.
“Economic data will be important but the developments across the banking sector could overshadow the data.”