Did the Federal Reserve intervene to end the Silicon Valley Bank crisis before the Asian market opened?

Written by: Chang Jia

Source: Wall Street Journal

In just 48 hours, Silicon Valley Bank experienced an announcement of financing, a massive bank run, and a plummeting market value, ultimately being taken over by the FDIC, triggering a financial storm that affected the global banking industry. With U.S. regulators finally deciding to intervene, at least the depositors of Silicon Valley Bank are safe.

This weekend, the Federal Reserve announced the launch of an emergency financing tool called the Bank Term Funding Program (BTFP), which will provide loans of up to one year to banks that pledge U.S. Treasury securities, agency debt, mortgage-backed securities (MBS), and other eligible assets.

This emergency relief measure was unanimously approved by the Federal Reserve Board. The Fed stated that the scale of BTFP is large enough to cover all uninsured deposits (over $250,000). The new measures significantly reduce the reasons for people to withdraw from banks.

Additionally, on the afternoon of March 12, Eastern Time, the Federal Reserve, the Treasury Department, and the FDIC issued a joint statement promising to ensure the safety of all depositors' funds. The three agencies stated in the joint statement that another bank facing a liquidity crisis, Signature Bank, has also been taken over by the New York Department of Financial Services, and all depositors will be fully compensated.

BTFP Will Provide Emergency Collateralized Loans to Banks

BTFP will allow banks to obtain loans from the Federal Reserve for up to one year by pledging U.S. Treasury securities, mortgage-backed bonds, and other debts as collateral. This allows banks to pledge their bonds to meet customer withdrawals without having to sell bonds at a loss. Last week, Silicon Valley Bank triggered a bank run by announcing a loss from selling AFS (available-for-sale bonds).

The main attraction of BTFP is that banks can borrow funds equal to the face value of their collateral. This is undoubtedly a significant benefit for struggling small banks. Since the Fed began raising interest rates, the market value of U.S. Treasury securities has significantly declined, leading to substantial unrealized losses for banks that purchased U.S. Treasury bonds. According to data from the Federal Deposit Insurance Corporation, the U.S. banking industry had unrealized losses of about $620 billion in bond investments at the end of last year.

Another benefit of BTFP is that the Federal Reserve will not require banks to pledge collateral exceeding their borrowings. Typically, banks face this requirement when borrowing from the so-called "lender of last resort"—the Federal Home Loan Banks (FHLB).

What if banks cannot repay all loans within a year? To prepare for this, the Treasury Department has provided $25 billion in credit protection to the Federal Reserve. However, the Fed expects that there will be no need to utilize these support funds.

Depositors Can Withdraw All Funds on Monday

The Federal Reserve, the U.S. Treasury Department, and the FDIC issued a joint statement indicating that starting from Monday, March 13, depositors can withdraw all of their funds. Any shortfalls will be covered by taxing other parts of the banking system, and U.S. taxpayers will not bear any losses. However, shareholders and some unsecured bondholders will not be protected.

The joint statement reads:

Today, we are taking decisive action to protect the U.S. economy by enhancing public confidence in the banking system. BTFP will ensure that the U.S. banking system continues to play its vital role in safeguarding deposits and providing credit to households and businesses, thereby promoting strong and sustainable economic growth.

Ackman's Warning

In an article yesterday, Wall Street Journal mentioned that prominent hedge fund manager Bill Ackman believes U.S. regulators must act before the Asian stock markets open to prevent the crisis at Silicon Valley Bank from spreading. Now, with the Federal Reserve stepping in, the crisis has finally been paused.

A person who has been working with SVB and the U.S. government told the media that the likelihood of Silicon Valley Bank or Signature Bank being acquired by competitors is low, as all potential buyers so far have decided to walk away.

Insiders indicated that PNC Financial Services Group and Royal Bank of Canada were invited to acquire Silicon Valley Bank but ultimately decided not to participate in the bidding because the economic rationale for the deal was not significant. The government has made it clear that it does not intend to use any taxpayer money to bail out Silicon Valley Bank. The five largest banks in the U.S., including JPMorgan Chase and Bank of America, will also not be buyers.