US, UK try to stem fallout from Silicon Valley Bank collapse

The governments of the United Kingdom and the United States have taken extraordinary steps to stop a potential banking crisis following the historic collapse of Silicon Valley Bank (SVB), even as another major bank was closed.

The UK Treasury and the Bank of England announced early Monday that they had facilitated the sale of SVB UK to Europe’s largest bank HSBC, securing £6.7bn ($8.1bn) of deposits.

British officials have been working all weekend to find a buyer for the UK branch of the California bank. Its collapse was the second-biggest bank failure in history after Washington Mutual’s in 2008.

US regulators have also been working all weekend trying to find a buyer. Those efforts appeared to have failed on Sunday, but US officials have assured all depositors that they can access all their money quickly.

The announcement comes amid concerns that the factors behind the failure of a Santa Clara, California bank could spread.

In a sign of how fast the financial bleeding is happening, regulators announced that New York’s Signature Bank also failed and was arrested on Sunday. With over $110 billion in assets, Signature Bank is the third-biggest bank failure in US history.

Santa Clara-based SVB, the 16th largest US bank, has been under threat since Friday, when its assets were seized following a run on depositors.

The bank’s financial health has come under scrutiny following the announcement of plans to raise $1.75 billion in capital following a loss-making bond sale.

In a brief press conference on Monday, US President Joe Biden tried to allay concerns by saying that “all customers who have had deposits in these banks can be sure – rest assured – they will be protected and have access to their money from today.”

That includes U.S. small businesses, said Biden, who also promised that “taxpayers won’t suffer any losses.” “We need to get a full account of what happened,” he told reporters. “In my administration, no one is above the law.”

SVB, whose business largely catered to technology workers and venture capital-backed companies, had an estimated $200 billion in assets at the time of the collapse.

Campbell R. Harvey, a professor at Duke University’s Fuqua School of Business, said SVB was not among the largest banks and failed for different reasons than the institutions that failed in 2007–2008.

“If you think about the global financial crisis, then several banks were at risk at the same time, and we started to learn about them, and these were not small players – these were large players, and they were all highly correlated,” Harvey told Al Jazeera.

This bank is different. It’s not in the top row. Most people have never heard of it, but it was geared towards tech investors in Silicon Valley… so I don’t see any resemblance to 2007 at all.”

Harvey said that while many banks were overleveraged in the run-up to the 2007-08 crisis, SVB failed because of its over-reliance on the technology sector, which lost trillions of dollars in value over the past year.

“SVP is a story about an undiversified loan portfolio,” he said. “It’s different.”

Volatile Markets

Bank stocks in Europe and Asia fell as the crash continued to hit markets, while major US banks were unable to sustain a short pre-market rally after authorities moved to stem the spread of the infection.

The European banking STOXX index fell 4.3% on Monday and fell 3.78% on Friday, the biggest two-day drop since Russia launched its invasion of Ukraine in February 2022.

Germany’s Commerzbank, which lost 7.5%, and Credit Suisse, which lost 7.8%, were the big losers.

Earlier in the day, Japan’s Topix banking index shed 4 percent, while Singapore’s largest banks also lost ground, dropping more than 1 percent.

London-listed HSBC shares tumbled 2.6% after the company announced it would buy UK subsidiary SVB for £1 ($1.21), helping to contain the negative impact in the UK.

In an effort to bolster confidence in the banking system, the US Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) said Sunday that all SVB customers will be protected and able to access their money. They also announced measures to protect the bank’s customers and prevent additional bank runs.

“This move ensures that the US banking system continues to fulfill its vital role of protecting deposits and providing access to credit for households and businesses in a manner that promotes strong and sustainable economic growth,” the agencies said in a joint statement.

Under the plan, SVB and Signature Bank depositors, including those whose assets exceed the $250,000 insurance limit, will be able to access their money on Monday.

Also on Sunday, another beleaguered bank, First Republic Bank, announced it had bolstered its financial health by accessing funding from the Fed and JPMorgan Chase.

in my direction, @SecYellen and my director of the National Economic Council worked with banking regulators to resolve problems at Silicon Valley Bank and Signature Bank.

I’m glad they found a solution that protects workers, small businesses, taxpayers and our financial system. https://t.co/CxcdvLVP6l

— President Biden (@POTUS) March 13, 2023

Emergency Loan Program

The Fed announced late Sunday an expanded emergency lending program that is designed to head off a wave of bank runs that could threaten the stability of the banking system and the broader economy.

Fed officials have described the program as akin to what central banks have been doing for decades: lend freely to the banking system so that customers can be sure they can access their accounts at any time.

The credit line will allow banks that need to raise cash to pay savers to borrow that money from the Fed, instead of selling Treasuries and other securities to raise money. SVB was forced to dump some of its Treasury bonds at a loss to fund withdrawals from its clients. Under the new Fed program, banks can place these securities as collateral and borrow under the emergency loan.

The Treasury has set aside $25 billion to offset any losses incurred under the Fed’s emergency lending facility. Fed officials said, however, that they do not expect any of this money to be used, given that the securities placed as collateral have a very low risk of default.

Analysts believe the Fed’s program should be enough to calm financial markets.

“Monday will certainly be a busy day for many in the regional banking sector, but today’s action dramatically reduces the risk of further contagion,” Jefferies investment bank economists said in a research note.

While Sunday’s move was the largest government intervention in the banking system since the 2008 financial crisis, its actions are relatively limited compared to what was done 15 years ago. The two failing banks themselves were not bailed out, and taxpayers’ money was not provided to the banks.

During a press conference on Monday, Biden said the US government “needs to reduce the risk of this happening again.”

“I’m going to ask Congress and the banking regulators to tighten the rules on banks to reduce the likelihood of this kind of bank failure happening again and to protect American jobs and small businesses,” he said.

Biden also said bank managers would be fired and investors would lose money. “They deliberately took a risk, and when the risk didn’t pay off, the investors lost their money,” he told reporters.

Regulators did not announce bailouts similar to those given to banks during the financial crisis of 2007–2008, insisting that investors and senior management would suffer losses and taxpayers would not have to support the institution.

“Let me be clear that during the financial crisis, there were investors and owners of systemically important large banks that were bailed out, and the reforms that have been made mean we are not going to do it again,” the US Treasury Secretary said. Janet Yellen said during an interview with CBS ahead of the announcement of the measures.

“But we care about contributors and are focused on meeting their needs.”