The United States Banking regulators have announced plans to backstop depositors with money at Silicon Valley Bank (SVB), which is seen as a critical step in avoiding a feared systemic panic triggered by the collapse of the tech-focused bank.
Reports across social media already indicate most bank customers were planning to pull out their funds from several other smaller banks in the US, threatening a systemic collapse of the US banking system and triggering a global contagion.
This means depositors at both failed SVB and Signature Bank in New York, which was also shut down due to similar contagion fears, will have full access to their deposits as part of multiple moves that officials have approved over the weekend. Signature Bank had been a popular funding source for cryptocurrency companies.
Reports indicate over 90% of Signature Bank and SVB customers are uninsured.
In an attempt to fully protect depositors, the Treasury Department designated both SVB and Signature as systemic risks, which gives it the power to unwind both institutions. The Federal Deposit Insurance Corporation’s (FDIC) deposit insurance fund will be used to cover depositors, many of whom were uninsured due to the $250,000 cap on guaranteed deposits.
What the Federal Reserve is saying
Federal Reserve Chair Jerome Powell, Treasury Secretary Janet Yellen, and FDIC Chair Martin Gruenberg said in a joint statement,
- “Today we are taking decisive actions to protect the U.S. economy by strengthening public confidence in our banking system. This step will ensure that the U.S. 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.”
- “After receiving a recommendation from the boards of the FDIC and the Federal Reserve, and consulting with the President, Secretary Yellen approved actions enabling 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 all of their money starting Monday, March 13. No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer.”
- “We are also announcing a similar systemic risk exception for Signature Bank, New York, New York, which was closed today by its state chartering authority. All depositors of this institution will be made whole. As with the resolution of Silicon Valley Bank, no losses will be borne by the taxpayer.”
Shareholders and some unsecured creditors will not be protected and will lose all of their investments.
- “Shareholders and certain unsecured debtholders will not be protected. Senior management has also been removed. Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law.”
- See the link to the joint statement.
According to officials on Sunday, the resolution of either SVB or Signature’s deposits will not result in any losses being absorbed by taxpayers. Any shortfall will be financed by imposing a levy on the rest of the banking system. They also stated that shareholders and particular unsecured debtholders will not receive any protection.
How Nigeria’s CBN deals with failed banks
This is similar to what the central bank of Nigeria does with AMCON, where all banks pay a levy towards banking resolution.
The approach to bailout both banks is similar to the model used by Nigeria’s central bank in recent years in bailing out banks that have failed in a similar manner. However, in the case of Nigeria, the central banks step into the bank by injecting capital and guaranteeing customer deposits. T
The US Fed did mention tax-payers money will not be used to bail anyone out suggesting funding will come from the sale of the bank’s asset. However, this will require temporary funding which is similar to what CBN does.
While the CBN does not use taxpayers’ money, analysts suggest it uses part of the CRR sequestered from banks or essentially prints money. The CBN has not published its financial statements in years making it difficult to ascertain.
Also, in the case of Nigeria, shareholders of the banks are completely wiped out in this process as AMCON takes over the bank, subsequently appointing new management. The new entity is managed until it is strong enough to be sold to new investors.
More US FED action
The Federal Reserve is also creating a new Bank Term Funding Program aimed at safeguarding institutions affected by the market instability of the SVB failure. The program will offer loans of up to one year to banks, savings associations, credit unions, and other institutions.
Those taking advantage of the facility will be asked to pledge high-quality collateral such as Treasuries, agency debt, and mortgage-backed securities.
- “….the Federal Reserve Board on Sunday announced it will make available additional funding to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors.”
Leave a Reply