As the banking crisis continues, each week we will provide Trends Journal subscribers with an overview of the current events forming the future banking crisis trends.
(Stocks were trading higher on Thursday after falling on Wednesday after Fed Head Jay Powell said he’d raise interest rates by 25 bps.)
Federal officials’ decision to recompense uninsured deposits at Signature and Silicon Valley banks and to open an emergency line of credit for the U.S. banking industry were sold to the public as a means to keep the financial system safe and reassure banks’ customers that their deposits were safe, according to the former Fed Head, Janet Yellen who is now playing the role as U.S. Treasury Secretary.
“We wanted to make sure the problems at Silicon Valley Bank (SVB) and Signature Bank didn’t undermine confidence in the soundness of banks around the country,” she explained. “We wanted to make sure there wasn’t contagion that could affect other banks and their depositors.”
“Our banking system remains sound and Americans can feel confident that their deposits will be there when they need them,” Yellen emphasized.
Following SVB’s collapse, Yellen ruled that the event posed a “systemic threat” to the economy, which enabled the Federal Deposit Insurance Corp. (FDIC) and the U.S. Federal Reserve to guarantee repayment of uninsured deposits at the failed banks and to broaden banks’ ability to borrow from the Fed.
The declaration also enabled the Fed to set up an emergency fund that will allow banks to take one-year loans if they might have a surge in demand for withdrawals.
The bank loans fund is being made up of fees collected from FDIC-insured institutions, Yellen and other administration officials have stressed; taxpayers will not be funding any of the provisions.
The central bank also loosened requirements for banks to borrow from its long-established discount window, its more conventional venue for loans to banks.
Banks had tapped the Fed’s emergency lending program for $11.9 billion by the end of last Thursday and had drawn $153 billion through the discount window.
Most of SVB’s depositors were small tech companies, entrepreneurs, and venture capital firms that used their accounts to pay day-to-day bills and payrolls. The bank had about $175 billion in deposits when it shut down.
About 94 percent of its deposits exceeded the $250,000 insurance limit set by the FDIC, according to S&P Global Intelligence. Streaming service Roku reportedly had $500 million in a single account at the bank.
Despite a federal guarantee that all SVB depositors will be made whole, Yellen said that not all uninsured bank deposits are now insured automatically if other banks fail.
Any similar future action would have to be approved by the White House and federal regulators, she explained.
She added that the actions do not constitute a step toward nationalizing the banking system.
Last week, Yellen coordinated a $30-billion infusion of capital from other banks for First Republic Bank, which ended Friday near collapse. Its shares were trading at $115 on 8 March and ended last week at $23. The price fell further through the weekend into Monday’s trading.
First Republic’s share price gave up another 8 percent even after the $30 billion in additional capital was pledged.
Yellen called for bank regulations to be reviewed and, if needed, adjusted to “make sure they are appropriate” to address the risks banks face.
“No matter how strong capital and liquidity supervision are, if a bank has an overwhelming run that’s spurred by social media so that it’s seeing deposits flee at that pace, a bank can be put in danger of failing,” she said.