WASHINGTON – The United States government stepped in on Sunday with a series of emergency measures to shore up confidence in the banking system after the failure of Silicon Valley Bank (SVB) threatened to trigger a broader financial crisis.

After a dramatic weekend, US regulators said the failed bank’s customers will have access to all their deposits starting on Monday and regulators set up a new facility to give banks access to emergency funds. The Federal Reserve made it easier for banks to borrow from it in emergencies.

Regulators also moved swiftly to close New York’s Signature Bank, which had come under pressure in recent days.

US President Joe Biden on Sunday evening said he planned to speak about the US banking system on Monday morning to reassure Americans after the bank failures.

“I will deliver remarks on how we will maintain a resilient banking system to protect our historic economic recovery,” Mr Biden said in a statement.

“The American people and American businesses can have confidence that their bank deposits will be there when they need them,” he added.

“I am firmly committed to holding those responsible for this mess fully accountable and to continuing our efforts to strengthen oversight and regulation of larger banks so that we are not in this position again,” he said.

A sense of relief swept through Silicon Valley as the regulators’ announcement came just after US futures started trading in Asia. Investors sent US S&P 500 stock futures up 1.2 per cent, while Nasdaq futures rose 1.3 per cent. But Asia stocks fell when markets opened in nervous trading.

“We think the steps taken by the Federal Reserve, US Treasury and FDIC (Federal Deposit Insurance Corporation) will decisively break the psychological ‘doom loop’ across the regional banking sector,” said Mr Karl Schamotta, chief market strategist at Corpay in Toronto. “But, fairly or not, the episode will contribute to higher levels of background volatility, with investors watching warily for other cracks to emerge as the Fed’s policy tightening continues.”

The Biden administration’s intervention underscores how a relentless campaign by the Fed and other major central banks to beat back inflation is putting stress in the financial system and global markets.

SVB, a mainstay for the start-up economy, was a product of the decades-long era of cheap money, with unique risks that made it especially vulnerable. But as a run on the bank ensued last week, worries that other regional banks shared similarities spread quickly.

With the Fed poised to continue raising interest rates, investors said the financial system may not be fully out of the woods just yet. The Fed will hold its next policy meeting on March 21 to 22.

“What investors have to expect... is that we are going to be dealing with a lot of event risk,” said Mr Michael Purves, chief executive of Tallbacken Capital Advisors. “There are still going to be lingering questions with other regional banks.”

Depositors protected

The collapse of SVB – the largest bank failure since 2008 – sparked concerns over whether small business clients would be able to pay their staff, with the FDIC protecting deposits of only up to US$250,000 (S$336,000).

Some 89 per cent of SVB’s US$175 billion in deposits were uninsured as at the end of 2022, according to the FDIC.

All depositors, including those whose funds exceed the maximum government-insured level, will be made whole, according to a joint statement by US Treasury Secretary Janet Yellen, Fed chair Jerome Powell and FDIC chair Martin Gruenberg on Sunday evening.

A senior Treasury official said the actions taken Sunday will protect depositors, while providing additional support for the broader banking system, but officials and regulators are continuing to monitor the health and stability of the financial system.

“The firms are not being bailed out. The depositors are being protected,” the official said.

The risk would be borne by the Deposit Insurance Fund, which has sufficient funds to do so.

“Any time a bank fails, especially one with billions of dollars in deposits, it is a matter that we take seriously,” the official said, pointing to potentially “large implications” for the US economy if companies with deposits in SVB were unable to keep paying their workers.

Providing the systemic risk exceptions is deemed quicker than waiting for a possible buyer, the official said.

“We will work with Congress and the financial regulators to consider additional actions we can take in the future to strengthen the financial system,” the official said. No further details were provided on possible regulatory or legislative changes.

Equity and bond holders ‘wiped out’

The official said depositors of New York’s Signature Bank, which was closed on Sunday by the New York state financial regulator, will also be made whole at no loss to the taxpayer.

Signature Bank, like SVB, had a clientele concentrated in the tech sector, and the securities on its balance sheet had eroded as interest rates rose. As at September, almost a quarter of Signature’s deposits came from the cryptocurrency sector, but the bank announced in December that it will shrink its crypto-related deposits by US$8 billion.

While all customer deposits will be protected, new policies adopted on Sunday will “wipe out” equity and bond holders in SVB and Signature Bank, a senior US Treasury official said.

Together with the Fed’s decision to make funds available to eligible financial institutions and ensure they can meet the needs of all their depositors, the steps would “restore market confidence”, the official said.

Fed funds futures surged in early trading to imply only a 28 per cent chance of a half-point rate hike by the Fed when it meets next week, compared with around 70 per cent before the SVB news broke last week.

The Fed said it will make additional funding available through a new Bank Term Funding Programme, which will offer loans of up to one year to depository institutions, backed by Treasuries and other assets that these institutions hold.

In March 2020, when the coronavirus pandemic and lockdowns triggered financial panic, the Fed announced a series of measures to keep credit flowing by lowering borrowing costs and lengthening the terms of its direct loans. By the end of that month, use of the Fed’s discount window facility shot up to more than US$50 billion.

In the middle of last week, before SVB’s collapse, there had been no indications of usage picking up, with Fed data showing weekly outstanding balances of US$4 billion to US$5 billion since the start of the year. REUTERS, AFP