The Government Takes Decisive Action on Bank Closures

By: Sulaiman Abdur-Rahman · March 13, 2023 · Reading Time: 4 minutes

The U.S. Treasury, Federal Reserve, and the Federal Deposit Insurance Corporation (FDIC) took decisive action over the weekend in an effort to shore up the public’s confidence in the U.S. banking system. This comes after the closure of Silicon Valley Bank (SVB) on Friday and Signature Bank on Sunday.

Secretary of the Treasury Janet Yellen guaranteed the bank deposits of both closed banks fully, meaning they are resolving the institutions in a way that will provide enough assets to cover all depositors. Yellen’s announcement means depositor’s will have access to all their money, even deposits that exceed the FDIC cap of $250,000.

President Biden and Treasury officials have said that taxpayers will not foot the bill for any losses associated with the resolution of either bank.

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What Happened to Silicon Valley Bank?

On Sunday, the Fed announced the official closing of SVB after taking control of it on Friday. Though it was the 16th largest bank in the country, SVB was not well-known outside startup and venture capital circles — or the region after which it was named.

SVB was a state-chartered bank headquartered in Santa Clara, California. A self-described “partner for the innovation economy,” the bank primarily counted startups, high-net worth executives, venture capital firms, and private equity funds as its clients. At the end of last year, Silicon Valley Bank had $211.8 billion in total consolidated assets, including $173.1 billion in customer deposits.

The beginning of the end for Silicon Valley Bank may be traced back to its disclosure on Wednesday, Mar. 8, that it had sold $21 billion of U.S. Treasuries and mortgage-backed securities at a loss of $1.8 billion after taxes. The bank said that the sale was in response to expected interest rate hikes, “pressured public and private markets, and elevated cash burn levels from clients as they invest in their businesses.” This was coupled with revised financial guidance that implied lower deposit balances, lower loan originations, narrower net interest margin, and lower net interest income. Additionally, the company announced an offering of both Common and Mandatory Convertible Preferred Stock.

In plain English, SVB had invested the cash it was holding in bonds, as many banks do. But because SVB felt it needed to have more cash on hand, reportedly to prevent a credit downgrade as well as to cover client withdrawals, it decided to sell the securities it could, even at a loss. (With the Federal Reserve raising interest rates, bonds have been dropping in value.)

The disclosure triggered an outflow of cash by depositors that, by Thursday, became a $42 billion “run on the bank,” leading to the Fed’s actions on Friday and Sunday. Although the FDIC normally insures up to $250,000 per depositor at a given institution, Yellen’s announcement means depositor’s will have access to all their money, even deposits that exceed the FDIC cap.

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What Happened to Signature Bank?

Signature Bank, a New York-based lender that catered to the crypto industry, was also shuttered over the weekend in an effort to rein in spreading risk in the banking industry.

The tech-focused institution had a market value of $4.4 billion as of Friday, compared to its $110.4 billion in total assets as of Dec. 31, 2022. After a 40% selloff this year, the bank reported last week that it was struggling, leading to a quick drawdown of the bank’s deposits.

As with SVB, depositors will be made whole, according to the Treasury and state bank regulators.

Consequences for Other Regional Banks

On Friday, trading of at least five banks was halted due to volatility, as investors quickly sold the stocks of similar banks such as First Republic Bank, Signature Bank, and Western Alliance. To calm markets, Treasury Secretary Janet Yellen released a statement, noting that the banking system “remains resilient”.

Part of the selloff early on Friday, big banks actually ended the day generally up or only slightly down, as investors’ fears of contagion subsided. KBW Bank index, which tracks 24 of the world’s biggest lenders, slid to $89.77 in the morning, but rallied and closed at $92.22.

The Takeaway

In the wake of these sudden closures, the banking sector saw its stocks slide while some institutional and startup clients may have experienced a cash crunch on Friday, when paychecks were due to go out.

All depositors at both institutions will be made whole, and have full access to their money starting Monday, March 13. These government actions will not protect everyone though, including shareholders and certain unsecured debt holders.

Money taken out of the Deposit Insurance Fund and given back to the depositors of the banks will be recovered by a special assessment on banks — as required by law — as opposed to taxpayers.

The full impact of the bank closures and the government action will continue to unfold in the weeks and months to come. Follow this and all of the latest news impacting the market at On the Money by SoFi.

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