FED creates a backstop for uninsured deposits at Silicon Valley Bank, using Federal Deposit Insurance Act

Financial regulators are discussing two different facilities to manage the fallout from the closure of Silicon Valley Bank if no buyer materializes, according to a source close to the situation, according to CNBC.

One way that the regulators would step in would be to create a backstop for uninsured deposits at Silicon Valley Bank, using an authority from the Federal Deposit Insurance Act, according to the source.

The move would also touch the systemic risk exception that allows the Fed to take extraordinary action to stem contagion fears.

Such a move could spur confidence at similar regional banks and institutions ahead of Monday, when they open and customers can withdraw from their accounts.

An additional step would be a “general banking facility” from the Federal Reserve that would support other financials with direct exposure to SVB so they wouldn’t have to materially change their business or take steep losses.

The moves would likely only be necessary if the FDIC was unable to find a buyer for all of SVB, or at least key parts of it.

FDIC was holding an auction for the bank, with final bids. Federal regulators are conducting an auction for Silicon Valley Bank, with final bids, according to a report from Bloomberg News.

The Federal Deposit Insurance Corporation took control of the bank and started an auction process.

The collapse of SVB, which was a key player in the technology start-up world, is the largest U.S. bank failure since Washington Mutual in 2008.

That bank was then purchased by JPMorgan Chase in a deal that restored the uninsured deposits.

A total or partial acquisition by another bank is one of the options regulators are exploring. Regulators shut down Silicon Valley Bank, marking the largest U.S. bank failure since 2008. Tens of millions in customer deposits were withdrawn in a run on the bank.

There has been concern among investors that other mid-sized banks could face similar pressure without federal support.

The Fed and FDIC will present these proposals before any action is taken. Treasury Secretary Janet Yellen told CBS earlier that no government bailout is on the table, gut that the department was working “to address the situation in a timely way.”

The California-headquartered organisation grew to become the 16th largest bank in the US, catering for the financial needs of technology companies around the world, before a series of ill-fated investment decisions led to its collapse.

What happened to SVB?

As the preferred bank for the tech sector, SVB’s services were in hot demand throughout the pandemic years, according to The Guardian.

The initial market shock of Covid-19 in early 2020 quickly gave way to a golden period for startups and established tech companies, as consumers spent big on gadgets and digital services.

Many tech companies used SVB to hold the cash they used for payroll and other business expenses, leading to an influx of deposits. The bank invested a large portion of the deposits, as banks do.

The seeds of its demise were sown when it invested heavily in long-dated US government bonds, including those backed by mortgages. These were, for all intents and purposes, as safe as houses.

But bonds have an inverse relationship with interest rates; when rates rise, bond prices fall. So when the Federal Reserve started to hike rates rapidly to combat inflation, SVB’s bond portfolio started to lose significant value.

If SVB were able to hold those bonds for a number of years until they mature, then it would receive its capital back. However, as economic conditions soured over the last year, with tech companies particularly affected, many of the bank’s customers started drawing on their deposits.

SVB didn’t have enough cash on hand, and so it started selling some of its bonds at steep losses, spooking investors and customers.

What triggered the run on the bank?

Given banks only keep a portion of their assets as cash, they are susceptible to a rush of demand from customers.

While SVB’s problems stem from its earlier investment decisions, the run was triggered on 8 March, when it announced a $1.75bn capital raising. It told investors it needed to plug a hole caused by the sale of its loss-making bond portfolio.

“Suddenly everyone became alarmed that the bank was short of capital,” says Fariborz Moshirian, professor at UNSW and director of the Institute of Global Finance.

Customers were now aware of the deep financial problems at SVB, and started withdrawing money en masse.

Unlike a retail bank that caters for business and households, SVB’s clients tended to have much larger accounts. This meant the bank run was swift.

Two days after it announced it would raise capital, the US$200bn company collapsed, marking the largest bank failure in the US since the global financial crisis.

Peter Sonner   by Peter Sonner