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FILE- The seal of the Board of Governors of the United States Federal Reserve System is displayed in the ground at the Marriner S. Eccles Federal Reserve Board Building in Washington, Feb. 5, 2018. Facing the prospect of a third financial crisis in less than two decades, the Federal Reserve initiated a broad emergency lending program late Sunday, March 12, 2023, intended to shore up confidence in the nation's financial system following the collapse of two large banks with deep ties to the tech industry. (AP Photo/Andrew Harnik, File)
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After two historic U.S. bank failures, here’s what comes next

22 Comments
By CHRISTOPHER RUGABER and KEN SWEET

Two large banks that cater to the tech industry have collapsed after a bank run, government agencies are taking emergency measures to backstop the financial system, and President Joe Biden is reassuring Americans that the money they have in banks is safe.

It's all eerily reminiscent of the financial meltdown that began with the bursting of the housing bubble 15 years ago. Yet the initial pace this time around seems even faster.

Over the last three days, the U.S. seized the two financial institutions after a bank run on Silicon Valley Bank, based in Santa Clara, California. It was the largest bank failure since Washington Mutual went under in 2008.

How did we get here? And will the steps the government unveiled over the weekend be enough?

Here are some questions and answers about what has happened and why it matters:

WHY DID SILICON VALLEY BANK FAIL?

Silicon Valley Bank had already been hit hard by a rough patch for technology companies in recent months and the Federal Reserve’s aggressive plan to increase interest rates to combat inflation compounded its problems.

The bank held billions of dollars worth of Treasuries and other bonds, which is typical for most banks as they are considered safe investments. However, the value of previously issued bonds has begun to fall because they pay lower interest rates than comparable bonds issued in today’s higher interest rate environment.

That's usually not an issue either because bonds are considered long term investments and banks are not required to book declining values until they are sold. Such bonds are not sold for a loss unless there is an emergency and the bank needs cash.

Silicon Valley, the bank that collapsed Friday, had an emergency. Its customers were largely startups and other tech-centric companies that needed more cash over the past year, so they began withdrawing their deposits. That forced the bank to sell a chunk of its bonds at a steep loss, and the pace of those withdrawals accelerated as word spread, effectively rendering Silicon Valley Bank insolvent.

WHAT DID THE GOVERNMENT DO SUNDAY?

The Federal Reserve, the U.S. Treasury Department, and Federal Deposit Insurance Corporation decided to guarantee all deposits at Silicon Valley Bank, as well as at New York's Signature Bank, which was seized on Sunday. Critically, they agreed to guarantee all deposits, above and beyond the limit on insured deposits of $250,000.

Many of Silicon Valley's startup tech customers and venture capitalists had far more than $250,000 at the bank. As a result, as much as 90% of Silicon Valley's deposits were uninsured. Without the government's decision to backstop them all, many companies would have lost funds needed to meet payroll, pay bills, and keep the lights on.

The goal of the expanded guarantees is to avert bank runs — where customers rush to remove their money — by establishing the Fed’s commitment to protecting the deposits of businesses and individuals and calming nerves after a harrowing few days.

Also late Sunday, the Federal Reserve initiated a broad emergency lending program intended to shore up confidence in the nation’s financial system.

Banks will be allowed to borrow money straight from the Fed in order to cover any potential rush of customer withdrawals without being forced into the type of money-losing bond sales that would threaten their financial stability. Such fire sales are what caused Silicon Valley Bank's collapse.

If all works as planned, the emergency lending program may not actually have to lend much money. Rather, it will reassure the public that the Fed will cover their deposits and that it is willing to lend big to do so. There is no cap on the amount that banks can borrow, other than their ability to provide collateral.

HOW IS THE PROGRAM INTENDED TO WORK?

Unlike its more byzantine efforts to rescue the banking system during the financial crisis of 2007-08, the Fed's approach this time is relatively straightforward. It has set up a new lending facility with the bureaucratic moniker, “Bank Term Funding Program.”

The program will provide loans to banks, credit unions, and other financial institutions for up to a year. The banks are being asked to post Treasuries and other government-backed bonds as collateral.

The Fed is being generous in its terms: It will charge a relatively low interest rate — just 0.1 percentage points higher than market rates — and it will lend against the face value of the bonds, rather than the market value. Lending against the face value of bonds is a key provision that will allow banks to borrow more money because the value of those bonds, at least on paper, has fallen as interest rates have moved higher.

As of the end of last year U.S. banks held Treasuries and other securities with about $620 billion of unrealized losses, according to the FDIC. That means they would take huge losses if forced to sell those securities to cover a rush of withdrawals.

HOW DID THE BANKS END UP WITH SUCH BIG LOSSES?

Ironically, a big chunk of that $620 billion in unrealized losses can be tied to the Federal Reserve's own interest-rate policies over the past year.

In its fight to cool the economy and bring down inflation, the Fed has rapidly pushed up its benchmark interest rate from nearly zero to about 4.6%. That has indirectly lifted the yield, or interest paid, on a range of government bonds, particularly two-year Treasuries, which topped 5% until the end of last week.

When new bonds arrive with higher interest rates, it makes existing bonds with lower yields much less valuable if they must be sold. Banks are not forced to recognize such losses on their books until they sell those assets, which Silicon Valley was forced to do.

HOW IMPORTANT ARE THE GOVERNMENT GUARANTEES?

They're very important. Legally, the FDIC is required to pursue the cheapest route when winding down a bank. In the case of Silicon Valley or Signature, that would have meant sticking to rules on the books, meaning that only the first $250,000 in depositors' accounts would be covered.

Going beyond the $250,000 cap required a decision that the failure of the two banks posed a “systemic risk." The Fed's six-member board unanimously reached that conclusion. The FDIC and the Treasury Secretary went along with the decision as well.

WILL THESE PROGRAMS SPEND TAXPAYER DOLLARS?

The U.S. says that guaranteeing the deposits won't require any taxpayer funds. Instead, any losses from the FDIC's insurance fund would be replenished by a levying an additional fee on banks.

Yet Krishna Guha, an analyst with the investment bank Evercore ISI, said that political opponents will argue that the higher FDIC fees will “ultimately fall on small banks and Main Street business.” That, in theory, could cost consumers and businesses in the long run.

WILL IT ALL WORK?

Guha and other analysts say that the government's response is expansive and should stabilize the banking system, though share prices for medium-sized banks, similar to Silicon Valley and Signature, plunged Monday.

“We think the double-barreled bazooka should be enough to quell potential runs at other regional banks and restore relative stability in the days ahead,” Guha wrote in a note to clients.

Paul Ashworth, an economist at Capital Economics, said the Fed's lending program means banks should be able to "ride out the storm.”

“These are strong moves,” he said.

Yet Ashworth also added a note of caution: “Rationally, this should be enough to stop any contagion from spreading and taking down more banks ... but contagion has always been more about irrational fear, so we would stress that there is no guarantee this will work.”

© Copyright 2023 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed without permission.

©2023 GPlusMedia Inc.

22 Comments
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It's all eerily reminiscent of the financial meltdown that began with the bursting of the housing bubble 15 years ago. Yet the initial pace this time around seems even faster.

And some "economists" will probably step up to argue that more socialism for millionaires and billionaires is needed to save the capitalist financial system.

Corporate assets which the public pays for should be nationalized public property.

2 ( +6 / -4 )

And some "economists" will probably step up to argue that more socialism for millionaires and billionaires is needed to save the capitalist financial system. 

Corporate assets which the public pays for should be nationalized public property.

Yeah, it’s working so well in California and NYC and the left wonders why the exodus from these places continue.

-3 ( +6 / -9 )

Well, the Fed wounded the banks by hiking interest rates, which won't do much to stop inflation, but will spread the suffering to other areas - loans and mortgages. Only fair that they stick the plaster on.

The interventions were to stop what are potentially some of America's next big things from collapsing before they could hit an IPO. If they lost a generation of tech innovation, it would pop up in foreign lands. The tech sector has underpinned US growth, soft power and global snooping access for three decades. Bizarrely, the USG in Washington is persistently attacking GAFA with almost as much gusto as Xi did in China, both chopping at the trunk of the trees they are sitting in.

In the UK, HSBC bought out the UK arm of Silicon Valley bank for £1. We have great sales here.

0 ( +3 / -3 )

Yeah, it’s working so well in California and NYC and the left wonders why the exodus from these places continue.

Nothing 'leftist ' about bailing out banks; that is pure socialism for the rich which is loved by you and yours.

Nationalizing and seizing banker assets and jailing them?

Now that would be leftist.

-1 ( +4 / -5 )

GBR48

the Fed wounded the banks by hiking interest rates,

That isn't trues. Banks normally profit from higher rates, as they widen the rate spread while they collect higher loan repayments as income. Japan's banks, for example, have long complained that low rates have devastated their business.

SVB's problem is that management decided to invest its reserves in illiquid long-term bonds in a bid to get higher returns. Risky and reckless.

7 ( +7 / -0 )

this is how antirussian sanctions works.USA have imposed sanctions on Russians,stole russian funds and expected Russia will fall.now it backfires to sanctions imposer.

this will affect any currency tied with USD.

jpy was 136 area now close to 130 so here is result for us.

more banks will follow usd will go down more.

good for japanese importers bad for japanese exporters.as for average japanese they may feel "rich on paper" but I dont expect any changes of prices for imported goods to go down anytime soon because of importers greed and will to maximize their profit.

-5 ( +2 / -7 )

The interventions were to stop what are potentially some of America's next big things from collapsing before they could hit an IPO

Pure corporate socialist propaganda

Interventions which are just wealth transfers from the public treasury to private business result in useless boondoggle scams like We work that have nothing to do with innovation.

Real innovation is coming from open source projects like OpenAI and Llama.

-1 ( +2 / -3 )

Should read LLM Large Language Model transformer architecture.

-2 ( +1 / -3 )

It’s the same cycle, over and over.

The average salary at SVB is over $250,000, debt to asset ratio of 185:1, no one in charge of risk management, but teams of people chattering about diversity and woke nonsense.

But everyone got their bonuses just hours before the takeover. Everybody knows the game. Everybody know the dice are loaded and to get as much as you can, then do it all over again because you’ll get bailed out again and again.

The banking industry is just the mob wearing ties.

2 ( +3 / -1 )

bass4funk: "Yeah, it’s working so well in California and NYC and the left wonders why the exodus from these places continue."

You guys are the ones who backed the deregulation of rules put in place that could have prevented this, and now, predictably, the wackos on the right are saying "the bank was too woke", same as they actually said the train derailment was caused by "woke culture". Anything to get your ignorant base to look at the shiny thing over there and not the problems you've caused and their results, I guess.

2 ( +5 / -3 )

Might I suggest the radical idea of hiring the best people based on merit, ability, and experience -- and not on sex, race, or any of the other the "woke" stuff?

Rightists love socialism for the rich as long as they are not "woke" or a minority.

It is pathetic and astro-turfed and why you have so many voting against their own economic interests and supporting corporate welfare.

0 ( +3 / -3 )

Funny how this isn't being widely reported at this time.

Might I suggest the radical idea of hiring the best people based on merit, ability, and experience -- and not on sex, race, or any of the other the "woke" stuff?

It is being reported in the rightwing media. Sounds like you are regurgitating the likes of Tucker Carlson.

Predictable. Yawn.

https://twitter.com/abughazalehkat/status/1635434035584331777?s=46&t=2cgM68useCIAD0Jdcn4nkQ

-1 ( +4 / -5 )

Predictable. Yawn.

but also True. Imagine that.

-1 ( +4 / -5 )

Nothing 'leftist ' about bailing out banks; that is pure socialism for the rich which is loved by you and yours.

Biden's plan does not "bail out" the bank - it bails out depositors. Those unlucky enough to have owned SVB stock will get nada.

3 ( +5 / -2 )

JeffLeeToday  08:35 am JST

GBR48

the Fed wounded the banks by hiking interest rates,

That isn't trues. Banks normally profit from higher rates, as they widen the rate spread while they collect higher loan repayments as income.

I think the problem is the speed at which rates were hiked. Banks did not have time to adjust their balance sheet.

0 ( +0 / -0 )

but also True. Imagine that.

No it isn't.

0 ( +3 / -3 )

Case and point: Leadership at SVB certainly isn't very diverse, not that I really care. Just still, it's rather silly to blame this on "woke" culture. It's a function of bad decision-making.

https://www.svb.com/leadership

4 ( +4 / -0 )

Cards fan

Case and point: Leadership at SVB certainly isn't very diverse, not that I really care. Just still, it's rather silly to blame this on "woke" culture. It's a function of bad decision-making.

https://www.svb.com/leadership

True. It's funny that when banks that have 100% male boards fail, nobody says: "well, that's the problem!"

3 ( +3 / -0 )

Don’t they?

diversity is our strength!

-3 ( +1 / -4 )

Don’t they?

Nope! There goes another idiotic rightwing claim. :)

2 ( +2 / -0 )

management decided to invest its reserves in illiquid long-term bonds in a bid to get higher returns. Risky and reckless.

Those bonds weren’t illiquid - they had just declined in value.

0 ( +0 / -0 )

The USA Today has a pretty concise explanation with graphics:

"Silicon Valley Bank collapse explained in graphics"

https://www.usatoday.com/story/graphics/2023/03/13/graphics-bank-collapse-silicon-valley/11466073002/

When Silicon Valley Bank collapsed on Friday, it created the second-largest bank failure in US history.

Here's how it all came tumbling down:

As the bank grew to be the 16th largest in America, SVB invested their funds in long-term bonds when rates were near zero.

This may have seemed like a good idea at the time, but when interest rates rose, those long-term bond prices fell, cratering their investments.

On Wednesday, SVB announced that it suffered a $1.8 billion after-tax loss and urgently needed to raise more capital to address depositor concerns.

The market reacted sharply and SVB lost over $160 billion dollars in value in 24 hours. 

As the stock fell, depositors moved quickly to withdraw money from the bank.

Banks only carry a portion of depositors' money in cash - called a fractional reserve. This meant that SVB couldn't give depositors their money because it was held in their long-term bond investments that were no longer worth as much.

In short, SVB didn't have the cash they needed to fulfill their obligations to their customers. As panicked withdrawal continued, a bank run was well-underway.

So the Federal Deposit Insurance Corporation took over SVB on Friday to get depositors access to their money by Monday, and because the bank's troubles posed a major risk to the financial system.

That's the sort of action that the 'FDIC Insured' sign that you may have seen in your local bank branch represents.

0 ( +0 / -0 )

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