The recent collapse of two large regional banks, and the expedited sale of Credit Suisse due to similar challenges, have left many in the financial services industry uncertain about the future. What should we understand about what happened, and what it might mean for the future of finance?
As everyone has now read about repeatedly, Silicon Valley Bank (SVB) collapsed due to a “run on the bank” involving customers withdrawing (or attempting to withdraw) their funds simultaneously. The run was prompted by fears that SVB could not honor withdrawals due to the decline in market value of long-term treasuries and other long-term assets. The decline in the value of these assets occurred due to the rise in interest rates over the past year, which has caused fixed income investments with lower interest rates to have a lower market value. Signature Bank was shut down by the New York Department of Financial Services and the Federal Deposit Insurance Corporation (FDIC) due to related concerns. At the time of the SVB collapse, the FDIC followed its protocols regarding the shutdown of a depository institution that is not subject to a systemic risk exception. This included shutting down SVB on Friday, March 10, 2023, establishing a new national bank, and guaranteeing access on Monday, March 13, for any deposits up to the FDIC insurance limit. That limit is presently $250,000 per depositor. As to any amounts in excess of $250,000, the FDIC noted an advance dividend would be paid later that week based upon assets sold, and the remaining amounts would be handled through the FDIC’s receivership process.
To put it mildly, SVB depositors and commentators exploded on social media regarding the potential loss or delayed access to significant amounts of business capital, with some noting various companies would be unable to make payroll without access to the funds in their operating accounts. As we now know, the Treasury, Federal Reserve, and FDIC invoked the systemic risk exception for both SVB and Signature Bank on Sunday, March 12, which enabled the agencies to guarantee all deposits of the banks. This exception is designed to enable federal agencies to prevent the adverse economic consequences of broader financial instability.
The Federal Reserve also established a new Bank Term Funding Program designed to provide liquidity to banks. The program allows banks to borrow money secured by U.S. treasuries, agency debt, mortgage-backed securities, and other qualifying assets as collateral. The program also allows banks to borrow funds based upon the par value of the assets, not the lower market value.