As the sudden collapse of Silicon Valley Bank (SVB) on Friday continues to roil markets, U.S. and European authorities have moved to ease fears over the health of the banking system.
Just two days after the authorities shuttered SVB in a shutdown that stranded billions in deposits, regulators took over a second troubled lender by closing New York-based Signature Bank, the third largest failure in U.S. banking history.
U.S. federal authorities stepped in to ensure depositors still had access to their funds at SVB and promised other institutions help in meeting customers’ needs, but markets remained on edge Monday following the bank’s sudden collapse.
The bank’s closure had followed interest rate hikes that hurt its startup customers and a failed capital raise attempt, spurring deposit withdrawals.
The shutdown sent a chill through Silicon Valley amid an otherwise gloomy period marked by tech layoffs and a pullback in spending as consumers tightened their wallets.
In Britain, banking giant HSBC bought SVB’s U.K. division for just 1 pound ($1.2) in a rescue deal overseen by the Bank of England (BoE) and the government, while French and German authorities said there were no risks to their financial systems.
Biden vows to fix ‘mess’
Amid fears over the wider sector, U.S. President Joe Biden vowed to hold “fully accountable” the people responsible for “this mess” and said he would deliver remarks on Monday morning on maintaining a resilient banking system.
“The American people and American businesses can have confidence that their bank deposits will be there when they need them,” Biden said.
In a joint statement on Sunday, the Federal Reserve (Fed), the Federal Deposit Insurance Corporation (FDIC) and the U.S. Treasury Department said SVB depositors would have access to “all of their money” starting Monday and that American taxpayers will not have to foot the bill.
They added that depositors in Signature Bank – a regional-size lender with significant cryptocurrency exposure which was shuttered after its stock price tanked – would also be “made whole.”
The Fed also announced it would make extra funding available to banks to help them meet the needs of depositors, which would include withdrawals.
“We are taking decisive actions to protect the U.S. economy by strengthening public confidence in our banking system,” the statement said.
“The U.S. banking system remains resilient and on a solid foundation,” due in large part to reforms and banking industry safeguards undertaken after the financial crisis of 2008, they added.
“Those reforms combined with today’s actions demonstrate our commitment to take the necessary steps to ensure that depositors’ savings remain safe.”
Regulators on Friday took control of SVB – a key lender to startups across the United States since the 1980s – after a huge run on deposits left the medium-sized bank unable to stay afloat on its own.
SVB’s implosion represents the largest bank failure in U.S. history behind Washington Mutual, which collapsed during the 2008 financial crisis.
Investors were unnerved by the speed at which SVB was toppled by customer withdrawals. The episode last week erased more than $100 billion in market value from U.S. banks, prompting swift action from government officials over the weekend to try and restore confidence in the financial system.
Markets fall further
The British government’s SVB U.K. rescue deal also guarantees deposits of customers, which includes major businesses in the technology and life science sectors.
“This (deal) ensures customer deposits are protected and can bank as normal, with no taxpayer support,” said British Treasury chief Jeremy Hunt, who had warned a day earlier that SVB’s collapse posed a serious risk to the U.K.’s tech sector.
Germany’s finance watchdog said the “distressed situation” of SVB’s German branch “does not pose a threat to financial stability.”
The regulator, Bafin, added it had ordered “a moratorium” on the bank’s German unit, which it said did not offer bank deposit services.
French Finance Minister Bruno Le Maire said no “special warning” was needed for local lenders.
“I don’t see any risk of contagion,” he told Franceinfo radio.
Despite the moves, European stock markets fell deeper into the red on Monday and most Asian indices finished lower, with banks taking a hit.
“The contagion risk remains for small banks with highly rate-sensitive clients, but the U.S. authorities now step in to avoid contagion,” said Ipek Özkardeşkaya, senior analyst at Swissquote Bank.
“The bank crisis will be sitting in the headlines, as solutions and possible contagion beyond the banking sector and beyond the U.S. borders will be on the menu of the week,” Özkardeşkaya said.
Investors punished the global banking sector on Thursday after SVB disclosed the extent of its troubles the day before.
Little known to the general public, SVB specialized in financing startups and had become the 16th largest U.S. bank by assets. At the end of 2022, it had $209 billion in assets and approximately $175.4 billion in deposits.
Hours before Sunday’s joint statement, Treasury Secretary Janet Yellen told CBS that the U.S. government wanted “to make sure that the troubles that exist at one bank don’t create contagion to others that are sound.”
Since Friday, there have been calls from the tech and finance sectors for a bailout, which Yellen ruled out.
Yellen said reforms made after the 2008 financial crisis meant the government was not considering this option for SVB.
“During the financial crisis, there were investors and owners of systemic large banks that were bailed out… and the reforms that have been put in place means that we’re not going to do that again,” she said.
In their joint statement, the U.S. federal agencies stressed shareholders and certain unsecured debtholders would not be protected.
Fed officials said “investors in those two banks will lose everything. Senior management of those two banks will bear losses and be removed.”
The officials said the “core goal” of the moves was to reassure bank customers they would have their money to pay their bills or meet payrolls for their businesses.
Meanwhile, Signature was a commercial bank with private client offices in New York, Connecticut, California, Nevada and North Carolina, and had nine national business lines including commercial real estate and digital asset banking.
As of September, almost a quarter of its deposits came from the cryptocurrency sector, but the bank announced in December that it would shrink its crypto-related deposits by $8 billion.
Signature Bank announced in February that its chief executive officer, Joseph DePaolo, would transition into a senior adviser role in 2023 and would be succeeded by the bank’s chief operating officer, Eric Howell. DePaolo has served as president and CEO since Signature’s inception in 2001.
The bank had a long-standing relationship with former President Donald Trump and his family, providing Trump and his business with checking accounts and financing several of the family’s ventures. Signature Bank cut ties with Trump in 2021 following the deadly Jan. 6 riots on Capitol Hill, and urged Trump to resign.
In a statement, New York Gov. Kathy Hochul said she hoped the U.S. government’s actions on Sunday would provide “increased confidence in the stability of our banking system.”
“Many depositors at these banks are small businesses, including those driving the innovation economy, and their success is key to New York’s robust economy,” she said.