W.hen one When a bank fails, a panicked question is often asked: “Who’s next?” Other financial institutions may be at risk due to ties to failed financial institutions, similar business models, or simply deteriorating investor sentiment. If there are too many funds to be covered by the deposit insurance scheme, depositors face losses.
These are exactly concern caused by The end of Silicon Valley Bank (SVB), the 16th largest lender in America after a failed financing attempt, Run Regarding the deposit on March 10th. Over the weekend, rumors spread on social media about potential problems with lenders in several other areas. Just in case, it was easy to imagine a nervous corporate treasurer deciding to move the deposit to the largest bank. However, on March 12, a joint response (FDIC) helped remove concerns about depositors while exposing another bank victim.
Their actions had two sides. The first was to repay depositors in full. SVB and Signature Bank, a New York-based lender with $110 billion in assets that was shut down by state officials on Sunday. The signing was closed to protect consumers and the financial system “in light of market events,” the agency said, “after working closely with other state and federal regulators.” In either case, the taxpayer does not have to pay the bill. Equity holders in both banks and many bondholders will be wiped out.of FDICThe Deposit Insurance Fund paid by all American banks covers the residual costs. Depositors at both banks will have full access to their money on Monday morning.
The second was to set up a new lending facility with the Fed called the Bank Term Funding Program. This allows banks to pledge government bonds and mortgage-backed securities (MBSs) and other eligible assets as collateral. A bank is entitled to a loan equal to the face value of the security it pledges. The borrowing rate for that cash is pegged to the market rate plus 0.1% for a ‘one-year overnight index swap’. These are generous conditions.government bonds and MBSThey often trade below par, especially when interest rates rise. Interest rates offered to banks closely track interest rates on Fed funds. 0.1% is not a penalty for access to facilities.
The actions taken by the Treasury Department and the Fed raise several questions.Will someone buy it first? SVB or signature. Things inevitably moved fast over the weekend as it was important to reassure depositors on Monday morning, senior Treasury officials say.When other banks bid SVB It is difficult to complete in a week as it requires extensive due diligence.the transaction of SVB Or signatures could come in the next few days or weeks. (March 13 HSBCEurope’s largest bank said it would buy British division SVB 1 pound, or $1.21. )
More importantly, people also ask whether these actions equate to government bailouts. It’s not an easy question to answer. Authorities can wipe out bond and stock holders and impose fees on banks to fully repay depositors. This suggests that other banks, not taxpayers, may bear the costs of fraud. SVB and signature. However, given the generous conditions under which banks can exchange high-quality assets for cash, it is clear that the state’s role in supporting the banking system is expanding.
An important role of central banks is to economist, By 1873, it was to act as the lender of last resort in the banking system. That way, you are free to lend at a penalty rate against good collateral. This allows central banks to stabilize the financial system and prevent illiquid lenders from triggering the collapse of otherwise solvent financial institutions. The Federal Reserve already has a loan facility called the discount window that allows banks to borrow against collateral at fair value. The new program not only protects banks from liquidity problems, but also insulates them from interest rate risk.it would probably have been saved SVB, took that risk.But it may also facilitate it further reckless by someone else. ■
Editor’s note: This work has been updated to include of HSBC purchase. It also clarified the nature of the loans the bank was entitled to receive.
https://www.economist.com/finance-and-economics/2023/03/13/americas-government-steps-in-to-protect-depositors-at-silicon-valley-bank US Government Intervenes to Protect Silicon Valley Bank Depositors