US regulators took over a second bank on Sunday, Signature Bank, and announced extraordinary measures intended to assuage fears that depositors may be withdrawing money from smaller lenders in the wake of the quick collapse late last week of Silicon Valley Bank.
The measures, including ensuring all deposits at SVB, are meant to bolster wavering faith in the banking system.
They were announced jointly by the Treasury, Federal Reserve, and the Federal Deposit Insurance Corp. on Sunday evening.
Regulators announced they had taken over Signature Bank, a major lender to crypto companies, on Sunday.
Depositors at the New York-based bank will be made whole, officials said.
A senior Treasury official said that step does not amount to a bailout, since stockholders and bondholders of SVB and Signature would not be protected.
The Federal Reserve and Treasury separately said they will use emergency lending authorities to make additional funds available to cover demand from banks that have been closed, in a further attempt to halt runs on other banks.
Officials took the unusual step of designating SVB and Signature Bank a systemic risk to the financial system, giving regulators the flexibility to underwrite deposits that are not insured. SVB depositors will be allowed to withdraw their entire funds Monday, officials said.
The government’s Bank Deposit Insurance Fund will cover all deposits in both banks, instead of a standard $250,000.
Federal regulators said that any losses in the government’s funds would be recovered through a special assessment of the banks, and the American taxpayer would bear no losses.
The central bank said it will provide further financing for banks under a new “bank term financing program” that would provide loans for up to a year to banks pledging U.S. Treasury securities, mortgage-backed securities and other guarantees.
Up to $25 billion from Treasury’s Exchange Stabilization Fund will support the Feds lending programs. Many of these securities have fallen in value since the Fed raised interest rates.
The provision will let banks borrow 100 cents on the dollar on securities trading at a potential price far lower than that, potentially leaving the government on the hook for losses that banks make.
Critics said that this step essentially offers backdoor subsidies to investors and management at banks for failing to properly manage their interest-rate risks.
The terms are more generous than the typical 90-day emergency loans banks receive under the Federal Reserve’s primary borrowing program, the “discount window”.
The program may indicate banks facing a run on their capital would not need to liquidate securities and accept losses in order to get money.
The fresh money gives banks a net of $70 billion of unspent cash, not counting money they would have been able to borrow under a new Federal Reserve loan facility.
First Republic serves wealthier customers who carry large balances that exceed the limit on their FDIC insurance. Investors are concerned the bank may be vulnerable to a run-up similar to that which took down Silicon Valley Bank. First Republic’s stock has fallen around 30% since Wednesday.
Sunday night’s announcements cap an insane weekend that saw regulators put up for sale the failed Silicon Valley Bank.
Regulators had difficulty finding a buyer on Sunday, according to one senior Treasury official, and were shifting gears to shore up deposits while trying to make an announcement to depositors Monday morning.
Federal Reserve Chairman Jerome Powell canceled plans Sunday to travel to the regularly scheduled central banking meetings in Basel, Switzerland, staying instead in Washington to handle crisis responses.
The $110 billion Signature Fund and $209 billion SVB are high-profile casualties in the Feds campaign to slow the economy and lower inflation.
The central bank has raised rates 4.5 percentage points in the last year, its fastest pace of increases since the early 1980s, and officials signal that further increases are likely.
Before SVBs ended last week, officials had indicated that they were committed to raising rates at least one-quarter percentage point, as they did last month, at the upcoming March 21-22 meeting.
At the same time, a strong-arm intervention from the Fed may be the awkward coda for a reversal of post-financial-crisis regulations of smaller and medium-sized banks undertaken over the past several years.
Officials signaled on Sunday that they will likely consider tighter capital requirements and liquidity rules, rolling back at least some steps taken under the Trump administration to loosen restrictions on smaller banks.
Federal regulators are trying to balance their desire to avoid widespread financial contagion, while avoiding the harmful political optics of rescuing financial institutions at taxpayers expense.
The new loan programs include no limits on compensation to bank executives. Biden administration officials said several times on Sunday that their moves were intended to protect depositors, and wouldn’t cost taxpayers anything.
A senior Treasury official said a Federal Reserve loan program will keep any additional bank runs from happening.
Nicholas Donahue, the co-founder of Atmos, a real-estate start-up, said he was about to close on a loan from Khosla Ventures that will help with next week’s payroll payments when he heard about the news.
New York-based Signature is one of the few banks making big plays on cryptocurrency, providing accounts and other services for cryptocurrency startups and large investors in digital assets. It eventually became one of the leading banks in the cryptocurrency space.
That focus, as well as its custom payments systems tailored to crypto companies, helped the bank double deposits over the course of two years. By the start of 2022, about 27% of its deposits came from its digital-asset clients.
The bank’s exposure to crypto became an issue as the years went by. The market plunge, which intensified after Sam Bankman-Fried’s cryptocurrency exchange, FTX, crashed in November, took out billions in deposits.
Signature’s stock fell 23% on Friday, the worst day since it went public in 2004. The bank has $110 billion in assets, with $88.6 billion in deposits, at the end of 2022.
Deposits to SVB soared in the wake of the pandemic, and the Federal government’s policy responses left technology companies awash with cash by 2021.
The Santa Clara, Calif.-based lender saw its total deposits grow to almost $200 billion as of March 2022, compared to just over $60 billion two years prior.
Because it invested most of this money in long-dated securities, which declined in value when interest rates rose, it risks big losses if it has to unwind its securities portfolio.
At the same time, its depositors were highly concentrated in the tightly knit world of startups and venture capital firms, leaving the bank uniquely vulnerable to run. The tech slowdown of the last year, along with rising interest rates, meant that a growing number of its venture-capital-backed customers were burning through their cash or withdrawing their deposits.
Startups pulled funds last week in an effort to avoid possible losses on deposits above a $250,000 cap insured by the federal government.
Those withdrawals, encouraged by some venture investors, set off a classic bank run, which ended Friday when the Federal Deposit Insurance Corp. intervened.
The swiftness of the collapse at SVB shocked analysts. The bank was shut down Friday morning; normally, regulators try to shut down failed banks late in the week, and simultaneously announce a sale of bank assets, using the weekend to move accounts.