The White House, Department of the Treasury, and other federal banking regulators swung into action over the weekend to prevent the failure of two banks with $264 billion in combined deposits from turning into a full-blown economic crisis.
The Treasury, Federal Reserve Board, and Federal Deposit Insurance Corporation (FDIC) announced Sunday all customer deposits at Silicon Valley Bank ($175 billion in deposits) and New York-based Signature Bank ($89 billion) would be fully protected. On Friday, the FDIC and California banking regulators closed Silicon Valley Bank (SVB); the FDIC and the New York State Department of Financial Services followed suit with Signature Bank on Sunday.
Is this move by regulators to ensure deposits a bailout? Depends on who you ask. Analysts on Bloomberg TV on Monday were calling the move a “bail in,” which the Bank of England defines as using investor funds, rather than taxpayer money, to bear losses when a firm fails.
Approximately 89 percent of SVB’s deposits were uninsured, according to a report from Reuters. The situation was much the same at Signature Bank, which had nine-tenths of its deposits uninsured at the end of 2022, according to the New York Times. Both banks had concentrated positions in particular industries: technology startups for SVB, New York real estate for Signature.
The debate on insured versus uninsured deposits centers on the FDIC’s rule that only the first $250,000 in any bank account would be insured by the agency in the event of a bank failure.
But the FDIC, Fed, and Treasury unveiled “systemic risk exception(s)” Sunday to that provision for both failed banks, meaning all depositors would be made whole. The regulators stated this would be done without using taxpayer money, a point President Joe Biden reiterated in remarks Monday.
“No losses will be borne by the taxpayers,” Biden said. “Instead, the money will come from the fees that banks pay into the Deposit Insurance Fund.
“[B]ecause of the actions that our regulators have already taken, every American should feel confident that their deposits will be there if and when they need them.”
Shareholders and certain unsecured debtholders will not be protected, the regulators noted, and senior managers at both banks have been removed. The FDIC set up receiver banks to handle daily banking and lending activities, allowing the banks to continue to operate while the agency pursues potential buyers.
HSBC on Monday acquired the U.K. arm of SVB.
The Fed also announced Sunday it would make additional funds available to depository institutions, “to help assure banks have the ability to meet the needs of all their depositors,” through a new Bank Term Funding Program. The program will offer loans of up to one year in length to provide “an additional source of liquidity against high-quality securities, eliminating an institution’s need to quickly sell those securities in times of stress.”
There are regulatory failures that led to the collapse of both banks, most notably the Fed not monitoring the risk profiles of regional banks not considered “too big to fail.”
The Dodd-Frank Act of 2010 required banks with more than $10 billion in assets to conduct annual stress tests, which help identify risks and the potential impact of adverse financial and economic conditions on the covered institution’s capital adequacy. In 2019, this requirement was eased so that only banks with $250 billion or more in assets had to conduct annual stress tests.
In 2023, only 23 financial institutions with a “large global footprint” will be required to conduct the full series of annual stress tests, according to banking regulators.
The Fed said Monday that Vice Chair for Supervision Michael Barr would lead a review into the supervision and regulation of SVB. The results of the review will be published May 1.
“We need to have humility and conduct a careful and thorough review of how we supervised and regulated this firm and what we should learn from this experience,” said Barr in a press release.
Better Markets, a Wall Street watchdog, called for bankers and regulators to be held accountable for the failure of SVB.
“SVB’s executives must be sanctioned for their gross mismanagement, if not reckless and illegal conduct, and the board of directors for their deficiencies, negligence, or worse,” said Better Markets President and Chief Executive Dennis Kelleher in a statement Monday. “… [T]he bank undertook enormous, unreasonable risks, and the Fed failed to identify and require those risks be mitigated, like a bank guard asleep on the job with headphones on during a robbery.”
Kelleher also laid blame on gatekeepers who ignored SVB’s risks.
“[K]ey gatekeepers like compliance and risk management, internal and external auditors, lawyers, bankers, fiduciaries, and others who may have been deficient must be held accountable,” he said.
The Department of Justice and Securities and Exchange Commission are investigating SVB’s collapse, according to a report from the Wall Street Journal.
Editor’s note: This story was updated March 14 to include reference to the DOJ and SEC’s reported investigation.
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