Treasury, Fed Backstop SVB, Close Signature, Unveil Emergency Fund

On Sunday evening in the US, Jerome Powell, Janet Yellen and FDIC Chair Martin Gruenberg said SVB depositors will be protected.

“After receiving a recommendation from the boards of the FDIC and the Federal Reserve, and consulting with the President, Secretary Yellen approved actions enabling the FDIC to complete its resolution of Silicon Valley Bank, in a manner that fully protects all depositors,” a joint statement read.

On Monday morning, everyone will have access to “all of their money,” and “no losses associated with the resolution of SVB will be borne by the taxpayer.”

In addition, New York took control of Signature Bank. All depositors there will be made whole too, and taxpayers likewise aren’t on the hook. Reports indicated Signature’s management learned of the decision to put the bank into receivership just minutes before the public.

The federal intervention capped a frantic 48 hours during which officials debated the use of an emergency authority exception for systemic risks. That exception was apparently activated.

In a related announcement, the Fed unveiled a new facility — the Bank Term Funding Program. It’ll offer loans of up to one year to banks, savings associations, credit unions and eligible depository institutions who can all pledge Treasurys, MBS and “other qualifying assets” as collateral for cash at par. Note the italics. That suggests Powell isn’t inclined to let this episode derail the inflation fight.

The idea, obviously, is to prevent banks from having to fire-sale securities and incur mark-to-market losses like those SVB took last week as part of an ultimately fruitless effort to restructure the balance sheet and avert a run. The Fed said the incentive for depositors to flee banks is now reduced, as is the risk of Treasury fire sales.

The new Fed facility will be backstopped by $25 billion from the ESF, which Yellen green-lighted. The Fed said it doesn’t expect to tap that backstop.

In addition, the Fed emphasized that the discount window is “open and available.” Terms will be accommodating, consistent with those for the new bank funding facility, “further increasing lendable value at the window,” as Powell put it.

So, you can add “BTFP” to the Fed’s alphabet soup of liquidity facilities (“Buy The F—in Panic,” maybe?). And you can consider lots of VC startup funding indirectly backstopped by the US Treasury. And you can consider moral hazard an irrelevant concept for the time being. I’m not saying that was the wrong thing to do. I’m just saying that’s what it’ll look like to critics.

The Fed was keen on the notion that nobody was bailed out Sunday. The new facility is a lending vehicle of last resort, and it was approved unanimously.

I’d note that a bipartisan group of lawmakers wrote a letter over the weekend encouraging Yellen to protect depositors, Powell to provide liquidity and the FDIC to consider raising the cap on deposit guarantees pending “rapid” consideration by Congress.

Everyone involved insisted that “the capital and liquidity positions of the US banking system are strong and the US financial system is resilient.”

This won’t be the end of it. I can assure you of that. These steps were plainly necessary and the timing of the announcements suggested both Yellen and Powell understood that letting markets price the uncertainty overnight was a risky gamble.

But I doubt seriously that the book is closed on this episode. The Fed emphasized on Sunday evening that it’s “carefully monitoring developments in financial markets.” On a call with reporters, a senior Treasury official said the US sees some institutions which appear to have similarities to SVB and Signature.


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45 thoughts on “Treasury, Fed Backstop SVB, Close Signature, Unveil Emergency Fund

  1. This seems like a very suboptimal resolution. SIVB contributed significant value to the US economy. Flushing the franchise along with all the employee expertise and relationships due to Treasury management errors is a significant and unnecessary deadweight loss for the economy generally, and especially the ecosystem of early stage tech and life sciences companies that SIVB helped fund – and might have helped fund had it been recapitalized and sold (without bailing out shareholders or lenders).

    1. No factual basis for your comment. SVB’s value to the U.S. economy seems mostly to have been as a mechanism to facilitate an exit mechanism for Sand Hill Road VCs. Not a linchpin of the U.S. economy any more than crypto is.

  2. Agree 100% it’s not over. Gut-wrenching ugly even if you expect it. The real market storm hasn’t even started. Poor Powell. Take away his guns, belts, knives, etc., and keep him on the ground floor under supervision. The inside of the guy’s mind must be a mess.

  3. Where is the money for ‘all deposits’ coming from? How is that not a loss borne by the taxpayers (not facetious or sarcastic)?

    The lending facilities seem like a bailout for any banks that are currently on shaky footing, rather than deposit insurance for all of their depositors.

    1. [Kind of guessing but…] The Fed taking underwater collateral at par winds up not losing cash (and not costing taxpayers money) so long as its held to maturity. It’s just that they’re way over paying for low yielding duration. If SVB had the luxury of not paying depositors their withdrawals until the bank’s assets rolled off, they would have (presumably) been able to cover all their liabilities.

      It will be interesting to see if any non-distressed banks try to exploit this.

    2. I believe in Covid times they used the “bazooka” and bought corporate bonds (Mr H’s excellent moral hazard reference really needs a follow up piece as we all watch the fireworks Monday)…

      This isn’t even as radical as that: the Fed always backstops banks with loans/transfers to ensure the liquidity plumbing “just works”.

      In a way the money for those deposits was already “there” when it was deposited (and as of March 7th) so the Fed’s just promising it’s “still there” (instead of evaporating with SVB).

      The sleight-of-hand are the ($80B?) MBS and other long duration assets which over time are miniscule to the Fed (who knows one of those venture bets could turn into the next Google or Faceboon).

  4. What are the CFOs and other financial dept employees doing with large uninsured deposits?????? Don’t they think? Don’t they do due diligence? Especially large public companies. Will these (incompetent?) employees lose their jobs? Their stock options? Should startups have better financial controls? Employees?

    How is a credit buyer all that different from an uninsured depositor?

    Once again we do it after the horse left the barn.

    Reminds me of the ’08 CP move.

    Seems like the Fed is like the fire dept that goes to someone’s house, helps them burn it down, then shows up to put the fire out (at a large loss) then rebuild the house.

    We never learn. CFOs, finance depts/Treasurers, the Fed and on and on………………………………………………. Sighhhhhhhhhhhhhhhhh

  5. Lots of thoughts on this.

    A. What rate is this lending facility offering? I’ve been an investor in businesses that went bankrupt, restructured, and issued new shares under a new company name months later. Of course I was compensated in pennies on the dollar warrants. So this smacks as a double standard. Regardless, I imagine this lending facility is going to lend at near zero rates which makes the entire exercise feel like more system rigging for the rich.

    B. What ever happened to the capital liquidity standard? This bank has been stressing about their viability for over a year and no one noticed they were not meeting the requirement?

    C. The credit agencies once again let everyone down. (See GFC) Moody’s had SVB at A3 on March 8th. S&P Global Ratings had them at BBB- on March 9th, after everyone already knew they were going under. This is ridiculous.

    All the Fed blaming ignores the fact that this business had an unsustainable operating model. Do we really expect the Fed to cover for bad managers when the regulators and ratings agencies fail to do their jobs?

  6. None of us can or should claim this was unexpected. Not perfect, but they had to do something quick.

    What upsets me more is the reaction from DeSantis and Fox. In a nutshell, the SVB failure was mainly due to the banks’ outsized focus on “woke” issues.

    The crown, so far, goes to Lisa Kennedy at Fox. She first opined that the crisis resulted from the fact that the chief risk officer at SVB was overly focused on his personal immigration and sexual status along with his posting on a LGBTQ blog. Well done there, hammering both immigrants and gay people,

    But later in he broadcast she nailed a space in the hall of fame with this quip: if he had paid less attention to providing woke safe rooms and, instead focused on the safety of bank depositors, perhaps this would not have happened. That’s brilliant!

    But seriously, how can you have faith in our future when the likely next president and the right wing chorus immediately cast a bank failure as a woke-triggered disaster?

  7. Contrary to mass s disfaith about Fed from this episode, I applaud their decisive action. This episode demonstrates what a leadership should include.

  8. So I guess 50 bps is off the table for March, I wonder if this “little episode” might bring a little bit of fear into the US consumer, perhaps enough to see services inflation relent in time for the Fed to get some cover, otherwise this will likely be a temporary fix until they break something that forces them to stop in full. Some other accident might be unavoidable even with no more hikes if we believe the long lag of policy means we are just about to feel the punch for the string of 75 bps hikes last year.

    1. I think a secondary aim of the bank term funding facility is to ensure the Fed can keep hiking if they have to in whatever increments they see fit. If you can post what you have at full value for cash from the Fed, then the mark-to-market is irrelevant.

  9. H-Man, ala the Fed to the rescue.Not sure that telling the risk takers you have a savior is the best course Meanwhile this is far from being over. The frogs are getting hot.

  10. Everybody was saying the rapid rise of interest rates was going to break something. Something broke, got Jerry rigged, keep moving forward.

    1. Slowly but surely, Chair Powell and his Fed colleaagues are draining the juice feeding the spec finance bubble. That’s a good thing.

    2. Was it the rapid rise of interest rates?

      This has the feel of a new-age bank run that can now happen in literally minutes, via technology, as opposed to days–when you had to physically run to the bank. Is this happening if VCs had NOT spread the word to their portfolio companies who then raced to withdraw their money? Is this happening if the bank wasn’t about 99% concentrated in VC portfolio companies that all know each other?

      If something truly breaks due to rising rates I think it’s more apt to be somewhere in the credit universe.

      1. It’s not a “single event caused this” scenario as Signature Bank is also going under (large Crypto exposure), blaming this on VCs is scapegoating (possibly just as partisan as Fox news whining about “SVB = woke”).

        Instead it’s the “tide going out” where incompetent (or worse) are being exposed. SVB certainly had a lot more businesses (>$250k depositors) than usual and seemed to take advantage of the Trump initiated relaxation of bank regulation.

        The government (united) are actually doing the right thing by protecting the people’s faith in the US banking system, so this time “it’s not broken” (seems they did learn from the GFC and Covid).

  11. What happened to all off the bank “stress testing” and increased capital requirements that was hoisted up the flagpole after ’08?

    1. I would like to know as well, I blame the AFS vs HTM practice … always seemed like a farce to me – just a way to get out of hedging

    2. I don’t think this will come as a surprise, but the Trump administration loosened the requirements, specifically for banks like SVB. You can google the specific changes, but there is a strong chance the regulations they rolled back likely would’ve flagged this much earlier.

  12. At Par!?! “The Fed said it doesn’t expect to tap that backstop.” They to say that, but I doubt they believe it.

    As of the Q4 FDIC quarterly report, there was $620 billion of unrealized losses in the US banking system. The US banking system has lost $700 billion in deposits from Q1 22 to Q4 22. As consumers and businesses continue to spend down excess savings bank deposits will continue to shrink and consumer spending beyond incomes will also end.

    Indeed this is not over. SVB (and a few others) are far out on the risk spectrum and not surprising they went first to go. As bank deposits continue to decrease other banks will have the same problems. This program will get heavy use at some point and is expansionary to M2 aka Feb Balance Sheet. Utilization of this vehicle will be inflationary. The inflation problem has not been solved and there is presently no path to getting inflation under 4%. The next rate hike doesn’t matter as much as the terminal rate which is still likely above 5 and likely closer to 6.

    We’re 2-4 quarters away from another financial crisis. The only question is the speed of the demand destruction. Will it be a crash or are we all frogs getting the slow boil?

    Let us not forget, the right wing hate cult that controls the House is looking to own the Libs so much that they want to destroy the American financial system. The debt ceiling is not resolved and I doubt we get next year’s fiscal budget without a government shut down.

    But once we get the “Great Reset” there is will be a multi-decade bull market.

    1. Glad to find another reader realized this! This kind of back-stop is a green light to go all in on longer term bonds with depositors’ cash. It’s levering QE!

  13. So if there weren’t enough ways to game the system already, they are now creating a new one.

    Here’s how it goes.

    We have one group of investors. Let’s call them the C-Team. (C for corrupt.). They open many accounts at a bank each funded at the $250,000 level.

    Now let’s bring in the B Team. This is the bank and they’re also corrupt. They invest the money in extremely risky ways, so as to indirectly benefit the C-Team. Eventually, the bank fails.

    Now let’s bring in the F team. This is the federal reserve and they are probably also corrupt. Now they bail out the bank and make all the accounts whole again. The C team gets all their money back, plus the benefit from what the B team was doing with those risky investments.

    (For example, the B team could have been buying property owned by the C team, and buying that property at inflated prices.)

    It’s like magic. The C Team has effectively robbed the taxpayers.

    Look, here’s the bottom line.

    If the Fed is insuring all these accounts, then the Fed must have strict regulations as to what the banks can do with the money.

    I will note that Trump, in the last administration, took a number of steps to weaken bank regulation. Why did he do that? Isn’t it obvious? He was getting a kickback.

    No wonder everyone is so angry these days. We’re being robbed non-stop.

    1. This sounds a lot like a conspiracy theory with “coordinating teams”. (The Savings and Loan crisis is more like what you’re describing, not counting the very long and expensive projects in Afghanistan and Iraq, which indicates there are easier/accurate historical precedents than your current theory.)

      The depositors put actual money in a bank (ignoring it’s all virtual), in the US we’d all like to think “that just works”. The Fed (and bi-partisan all branches of govt) are doing their job (which we, our parents and grandparents, all benefit from).

      Yes Trump is corrupt and likely took kickbacks for everything he did, but he didn’t engineer this instance. Instead Occam’s Razor says the wealthiest most benefit from financial (and ideally other) stability so the Fed does seem to act on behalf of the wealthiest.

      Likely taxpayers won’t notice this blip at all (the Fed made money on their GFC actions); everybody will “get robbed” (lost jobs, lost savings, Depression) if there are more bank runs.

    2. Let’s tone down the conspiracy stuff a little bit please. This comment isn’t even close to an accurate description of what happened here. This is a story about a lot of things, but I’m not sure “corruption” is one of them. And no taxpayer money is involved.

  14. It appears that the Fed just smashed their head into the “glass ceiling” for interest rates/rate increases.
    Go long SPY?
    And does this mean the Federal Reserve is accelerating the rate at which the US becomes even more like Japan?

    1. Empty,
      I was having the same thoughts regarding SPY. Futures prices seemed to support the idea initially. But reading this article made me think twice: If the new (cool?) Fed acronym allows banks to post collateral at par, then indeed further rate hikes might not be off the table. My guess is the glass ceiling is not yet hit.
      Further, the current uncertainty will probably translate into volatility, so I kept my hands off the “buy” button.
      Time will tell if that’s been wise.

  15. We just found out what the Fed cares about more than inflation, their friends. And would you look at that, crypto is rallying.

    1. I was watching the crypto rally last night as well. I’m concerned (with no supporting evidence yet) that bitcoin is seen as a “safe haven” from banks. This is insane and I hope this doesn’t prove true.

      The concern is this jump in BTC spot is driven by demand related to bank withdrawals (USD to BTC exchange). If that’s true, the fear in the “system” is far greater than can be controlled/fixed by the Fed.

      1. It is my very unpopular opinion that bailouts reinforce bad decision making. The banks that are currently being bailed out drove the crypto bubble. By saying, “hey don’t worry about it, we’ve got you covered” the Fed is basically saying keep pumping money into bad investments. They have become the parent who refuses to stop paying their 25 year old kid’s credit card bill because they don’t want anything bad to happen to them. Of course, the only 25 year olds who have parents paying their credit card bills are rich people. The same holds true with the Fed. They wouldn’t even consider bailing out a small minority owned bank who’s patrons were working class folks in the deep south. But as soon as it’s rich guys throwing millions into stupid investments, well we better “protect the banking system”.

        Put another way, if a bank went under that say, funded an underground meth empire, I doubt the Fed would show up. But here we have a bank funding fake and possibly illegal alternative currencies and they didn’t even wait a weekend to step in and help. And for THIS to be the reason to pause rate hikes, I mean come on! Credibility = destroyed.

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