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Federal regulators announced on Sunday that another bank had been closed and that the government would ensure that all depositors of Silicon Valley Bank — which failed Friday — would be paid back in full as Washington rushed to keep fallout from the collapse of the large institution from sweeping through the financial system.
The Federal Reserve, Treasury and Federal Deposit Insurance Corporation announced in a joint statement that “depositors will have access to all of their money starting Monday, March 13.” In an attempt to assuage concerns about taxpayers footing the bill, the agencies said that “no losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer.”
The agencies also said that they would make whole depositors at Signature Bank, which the government disclosed was shut down on Sunday by New York bank regulators. The state officials said the move came “in light of market events, monitoring market trends, and collaborating closely with other state and federal regulators” to protect consumers and the financial system.
The collapse of Signature marks the third bank failure within a week. Silvergate, a California-based bank that made loans to cryptocurrency companies, announced last Wednesday that it would cease operations and liquidate its assets.
Amid the carnage, the Fed also announced that it would set up an emergency lending program, with approval from the Treasury, to funnel funding to eligible banks and help ensure that they are able to “meet the needs of all their depositors.”
Concern over a wide-reaching problem in the banking sector started in earnest after the F.D.I.C. took over Silicon Valley Bank on Friday, putting nearly $175 billion in customer deposits under the regulator’s control. The bank’s failure was the largest since the depths of the financial crisis in 2008. While its customers with deposits of up to $250,000 were insured by the F.D.I.C., the bank had a large number of accounts over that limit — and there was no guarantee that those clients would receive their money in full.
That reality sent tremors through the banking industry over the weekend, prompting the government to race to sell off the bank to a private buyer or to come up with some other solution. Officials and economists worried that people with uninsured bank accounts at other regional banks might begin to fear for the safety of their own deposits — which could prompt them to pull their money out and move it to bigger banks, thinking they are safer. That, some warned, could turn what might otherwise be a one-off bank failure into a full-blown financial crisis.
A Treasury official said that regulators ultimately decided to move forward with their plan because of how swiftly Silicon Valley Bank had failed — and how challenging it was proving to be for a buyer to vet its books by Monday. The official emphasized that the actions should not be considered to be a “bailout,” noting that the company’s shareholders and those who own its debt would be wiped out. The official pointed to the small businesses that deposited their money at Silicon Valley Bank and would have faced steep challenges in paying employees and other bills if their deposits were not covered.
The government’s plan to avert a catastrophe took advantage of an exception that allows the F.D.I.C., which is usually supposed to clean up a failed bank in the cheapest way possible, to incur additional costs if there is a risk to the financial system involved. The regulator will tap the Deposit Insurance Fund to make sure it can pay back depositors in full. That fund comes from fees paid by the banking industry, which the Treasury official emphasized.
The agencies said that “any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law.”
The Fed’s new lending program — backed by $25 billion in cash from a pot of money at the Treasury — will offer up to one-year loans to banks, savings associations, credit unions and other eligible depository institutions in exchange for collateral including U.S. Treasuries, agency debt and mortgage-backed securities.
The program will provide a workaround to financial institutions that have seen the market value of their long-term asset holdings fall as interest rates have risen. While many banks, like Silicon Valley Bank, are sitting on big “unrealized losses” because of the shift in rates over the past year, they will be able to borrow against the original value of their asset holdings at the Fed. That will give them bigger cash infusions, and prevent them from having to sell in desperation.
The sweeping measures underscored how dire officials worried the situation could become. The actions suggested that the government had become worried that the cracks that surfaced at Silicon Valley Bank earlier this week — ones that tied back to a recent and rapid rise in interest rates as the Fed fights inflation — could morph into a systemwide crisis if not halted with dramatic action.
The Treasury official said that regulators believed other “peer” banks could were poised to face similar outflows of deposits, the Treasury official said, but hoped that the new facility will reduce the chances of runs on otherwise healthy financial institutions.
The moves “demonstrate our commitment to take the necessary steps to ensure that depositors’ savings remain safe,” the agencies said in their joint statement.
Signature Bank’s failure — which was newly unveiled in the Sunday announcement — occurred quickly and surprised insiders, according to a person familiar with the matter. Signature had long specialized in providing banking services to law firms, providing everything from cash management services to escrow accounts for holding client money.
The bank had experienced heavy outflows of deposits on Friday but by Sunday the situation appeared to have stabilized. Signature executives believed they were well capitalized even if they took their realized losses, the person said.
While the federal agencies painted their moves as necessary responses aimed at averting a broader meltdown, they quickly drew some backlash. Sheila Bair, the former chair of the F.D.I.C., said the move was puzzling.
“This is a $23 trillion banking system,” she said. “It just doesn’t make sense to me why banks this size, their failures would cause systemic ramifications.”
It remains to be seen if the moves to stabilize the financial system will succeed.
“Rationally, this should be enough to stop any contagion from spreading and taking down more banks, which can happen in the blink of an eye in the digital age,” Paul Ashworth, chief North America economist at Capital Economics, wrote in a note to clients. “But contagion has always been more about irrational fear, so we would stress that there is no guarantee this will work.”
Emily Flitter, Maureen Farrell and Karoun Demirjian and contributed reporting.