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The US government is stepping in to protect Silicon Valley bank depositors

wThe one chicken The bank collapses, and the panic-stricken question is, “Who’s next?” Other financial institutions could end up exposed because of their connections to the failing institution, because they use similar business models or simply because investor sentiment deteriorates. Depositors face losses if their funds are too large to be covered by deposit insurance plans.

These were exactly the concerns raised by the Silicon Valley bank collapse (SVB), which is the sixteenth lender in America, after a failed attempt to raise capital and a run on its deposits on the tenth of March. Rumors over the weekend were circulating on social media about potential problems at a few other regional lenders. It was easy to imagine nervous corporate treasurers deciding to shift their deposits to the biggest banks, just in case. But on March 12, a joint response from the US Treasury, Federal Reserve, and Federal Deposit Insurance Corporation (FDIC) released:Federal Insurance Corporation) to remove concerns about depositors, while revealing another banking victim.

Their work was twofold. The first is the full payment of depositors in SVB And Signature Bank, a New York-based lender with $110 billion in assets, was shut down by state authorities on Sunday. Authorities said the signing was closed to protect consumers and the financial system “in light of market events” and after “cooperating closely with other state and federal regulators.” In neither case will taxpayers have to foot the bill. The equity holders and many debenture holders of both banks would be wiped out; the Federal Insurance CorporationAny remaining costs will be borne by the Deposit Insurance Fund, which is paid by all US banks. Depositors of both banks will have full access to their funds on Monday morning.

The second is to create a new lending facility, called the Bank Term Financing Program, at the Federal Reserve. This would allow banks to mortgage Treasury notes and mortgage-backed securities (Mohammed bin Salmans) and other qualifying assets as collateral. Banks will be eligible for loans equal to the face value of the securities they pledged. The borrowing rate will be fixed to that cash based on a “one-year index swap overnight,” market interest rate, plus 0.1%. These are generous terms. Treasury bonds and Mohammed bin SalmanThey often trade below their face value, especially when interest rates are rising. The rate that is offered to banks closely tracks the fed funds rate; 0.1% is not a huge penalty for getting into the facility.

The actions of the Treasury and the Federal Reserve raise many questions. The first is whether anyone will buy SVB or signature. A senior Treasury official says things are necessarily moving at a high speed over the weekend, because it was important to reassure depositors on Monday morning. To another bank to bid for SVB May require extensive due diligence, which is difficult to complete over one weekend. deal for SVB Or the signature could come in the coming days or weeks. (On March 13th HSBCEurope’s largest bank, said it would buy the British arm of SVB For £1 or $1.21.)

More importantly, people will also ask if these measures amount to a government bailout. This is not easy to answer. Administrators could pay depositors in full by eliminating bond and stock holders, and perhaps by charging banks a fee. It suggests that other banks, rather than taxpayers, may bear the cost of misdeeds SVB and sign. However, even as it also eliminates two lenders, it is clear that the role of the state in propping up the banking system has expanded, given the generous terms under which banks can exchange high-quality assets for cash.

Walter Bagehot, former editor of the the economist, In 1873, he would act as a lender of last resort to the banking system—lending freely, against good collateral, at a penalty rate. This allows the central bank to stabilize the financial system, and prevent an illiquid lender from causing the demise of affluent institutions. The Fed already has a lending facility, called the discount window, where banks can borrow against their collateral at fair value. The new program not only protects banks from liquidity problems, but also insulates them from interest rate risk. Maybe that could have saved it SVB, which took on this risk. But it may also encourage more of this recklessness in others.

Editor’s note: This widget has been updated to include HSBC buying. We also clarified the nature of the loans that banks are entitled to obtain.


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