the American authorities want to put an end to the bank panic
They promise that as of Monday morning, all SVB depositors will have access to their deposits, regardless of their amount.
On Sunday evening, Washington time, US banking authorities announced measures aimed at cutting short a contagion from the banking crisis born from the bankruptcy of the Californian establishment Silicon Valley Bank (SVB). Sick banks will not be saved, but seized. On the other hand, their customers will be protected.
“The American people and American businesses can have confidence in their bank deposits. They will be there when they need them“, declared the American president Joe Biden in a press release. The US Treasury, the Federal Reserve and the Federal Deposit Insurance Corp. (FDIC) promise that as of Monday morning, all SVB depositors will have access to their deposits, regardless of their amount. The standard FDIC guarantee, capped at $250,000, is therefore de facto replaced by a full guarantee.
This step is important because most of the remaining deposits with SVB were not covered by the FDIC. Hundreds of companies, customers of the Santa Clara bank, risked this Monday morning no longer being able to pay their employees and their bills, due to the bankruptcy of their bank specializing in services to young companies in the technology sector. In addition, other SVB customers risked waiting weeks to recover all or part of their funds beyond the $250,000 cap. They would have received only certificates entitling them to a share of the proceeds of the liquidation organized by the FDIC. This catastrophic scenario, likely to fuel a bank panic throughout the country, and a cascade of corporate bankruptcies, is now supposed to be ruled out.
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Boosting access to emergency cash
An unprecedented outflow of depositors on Wednesday and Thursday, reaching $42 billion, forced SVB, the sixteenth-largest bank in the United States, into bankruptcy. The wind of panic was born from calls by major venture capital funds in the San Francisco area for their partners to flee SVB, an institution threatened by a lack of liquidity, after being forced to sell at a loss its huge $21 billion Treasury bond portfolio.
Second measure announced in Washington: the Federal Reserve is creating a new facility to boost all banks’ access to emergency liquidity. This is to avoid any delay in the functioning of the liquidity circuits controlled by the central bank. The crisis reveals shortcomings in the supervision of medium-sized banks, establishments which, unlike the largest institutions, were not judged “systemicand as such escape the risk controls imposed on the financial giants. She also demonstrates that the rapid rise in the Fed’s key ratesfrom zero to 4.75% for a year, has weakened many institutions that have invested a large part of their resources in now devalued government bonds.
The SVB affair is serious enough to weigh on the Fed’s monetary policy and encourage the latter to moderate, or even suspend, its rate hikes which are supposed to calm demand and curb inflation. Jan Hatzius, economist at Goldman Sachs Bank, believes that the Fed will not raise its key rate on March 22 as expected.due to stress in the banking system“. This would seriously affect the credibility of the US central bank.
As Congress raises alarm over potential taxpayer-funded bank bailout, Treasury, Fed and FDIC stress shareholders of SVB and other potentially troubled banks are in no way protected . The measures, financed by an additional contribution from the banks to the FDIC, are intended solely to protect customers, collateral victims of errors in the management and supervision of their banks. In addition, a second bank, Signature Bank, a New York establishment, the 29th largest bank in the United States, was seized by the regulators. Specializing in business services in the cryptocurrency sector, it had been suffering from large withdrawals for a few days and was in danger of running out of cash in turn.