The US government is trying to stop a possible banking crisis
NEW YORK (AP) – The U.S. government on Sunday took extraordinary steps to halt a potential banking crisis following the historic failure of Silicon Valley Bank, assuring all depositors of the failed institution that they can quickly access all of their money, shut down even as another big bank.
The announcement came amid fears that the factors that led to the failure of the Santa Clara, California-based bank could spread. Regulators had been working all weekend to find a buyer for the bank that was the second largest bank failure in history. Those efforts appeared to have failed on Sunday.
In a sign of how fast the financial hemorrhage was happening, regulators announced that New York-based Signature Bank had also failed and would be seized on Sunday. With more than $110 billion in assets, Signature Bank is the third largest bankruptcy in US history.
The near-financial crisis that US regulators had to step in to prevent Asian markets from starting on Monday left Asian markets on edge. Japan’s benchmark Nikkei 225 slipped about 1.2% in morning trade. Australia’s S&P/ASX 200 lost 0.6% to 7,104.30. However, South Korea’s kospi was little changed.
To boost confidence in the banking system, the Treasury Department, Federal Reserve and FDIC said Sunday all Silicon Valley Bank customers would be protected and able to access their money. They also announced steps to protect the bank’s customers and prevent further bank runs.
“This move will ensure that the U.S. banking system continues to fulfill its important role in protecting deposits and providing access to credit for households and businesses in a way that supports strong and sustained economic growth,” the agencies said in a joint statement.
Under the plan, depositors at Silicon Valley Bank and Signature Bank, including those whose holdings exceed the $250,000 insurance limit, will be able to access their money Monday.
In a separate move, the Federal Reserve late Sunday announced an accommodative emergency lending program aimed at stemming a spate of bank runs that would threaten the stability of the banking system and the economy at large.
Fed officials characterized the program as similar to what central banks have been doing for many decades: Lend credit to the banking system for free, so customers can be sure they can access their accounts when they need them.
The lending facility will allow banks that need to raise cash to pay depositors to borrow that money from the Fed, rather than having to sell Treasuries and other securities to raise the money. Silicon Valley Bank was forced to sell some of its Treasuries at a loss to fund its customers’ withdrawals. Under the Fed’s new program, banks can post these securities as collateral and borrow from the emergency facility.
The Treasury has set aside $25 billion to cover losses incurred under the Fed’s emergency lending facility. But Fed officials said they anticipate not having to use that money because the securities pledged as collateral have very little risk of default.
Analysts said the Fed’s program should be enough to calm financial markets on Monday.
“Monday will certainly be a stressful day for many in the regional banking sector, but today’s actions dramatically reduce the risk of further contagion,” economists at Jefferies, an investment bank, said in a research note.
Although Sunday’s moves represented the government’s most sweeping intervention in the banking system since the 2008 financial crisis, its actions are relatively limited compared to what was done 15 years ago. The two failed banks themselves were not bailed out, and tax money was not made available to the banks.
President Joe Biden said Sunday night, returning to Washington aboard Air Force One, that he would address the banking situation on Monday. In a statement, Biden also said he was “determined to hold those responsible for this mess fully accountable and to continue our efforts to strengthen oversight and regulation of larger banks so that we don’t find ourselves in that position again.”
Regulators rushed to shut down Silicon Valley Bank, a financial institution with more than $200 billion in assets, on Friday as it experienced a traditional run on the bank, with depositors withdrawing their funds all at once. It is the second largest bank failure in US history, behind only Washington Mutual in 2008.
Some prominent Silicon Valley executives feared that if Washington didn’t bail out the failed bank, customers would attack other financial institutions in the coming days. Share prices at other banks that supply tech companies, including First Republic Bank and PacWest Bank, have plummeted in recent days.
The bank’s clients include a range of companies in California’s wine industry, where many wineries depend on Silicon Valley Bank for loans, and tech startups committed to fighting climate change. Sunrun, which sells and leases solar power systems, had less than $80 million in cash in Silicon Valley. Stitchfix, the popular apparel retail website, announced in a recent quarterly report that it has a line of credit of up to $100 million with Silicon Valley Bank and other lenders.
Tiffany Dufu, founder and CEO of The Cru, a New York-based women’s career coaching platform and community, posted a video on LinkedIn from an airport restroom on Sunday, saying the banking crisis has tested her resilience placed. With her money tied up at Silicon Valley Bank, she had to pay her employees from her personal bank account. Assisting with two teenagers who will be going to college, she said she was relieved to hear the government’s intention was to make savers healthy.
“Small companies and early-stage start-ups don’t have much access to leverage in a situation like this, and we’re often in a very vulnerable position, especially when we have to fight so hard to get the wires into your bank at the start especially for me as a black founder,” Dufu told The Associated Press.
Silicon Valley Bank began sliding into bankruptcy when its customers, mostly tech companies that needed cash as they struggled to get funding, began withdrawing their deposits. The bank had to sell bonds at a loss to cover the withdrawals, leading to the largest collapse of a US financial institution since the height of the financial crisis.
Yellen described the rising interest rates, which were raised by the Federal Reserve to fight inflation, as the core problem of the Silicon Valley Bank. Many of its assets, such as bonds or mortgage-backed securities, fell in market value as interest rates rose.
Sheila Bair, who served as chair of the FDIC board during the 2008 financial crisis, recalled that in almost all bank failures during that period, “we sold a failed bank to a healthy bank. And normally the healthy acquirer would also cover the uninsured because they wanted to make the most of the franchise value of those large depositors in a way that is the best outcome.”
But at Silicon Valley Bank, she told NBC’s Meet the Press, “this was a liquidity failure, it was a bank run, so they didn’t have time to prepare to market the bank. So they have to do that now and catch up.”
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Rugaber and Megerian reported from Washington. Sweet and Bussewitz reported from New York.
Associated Press writers Hope Yen in Washington and Jennifer McDermott in Providence, Rhode Island contributed to this report.
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