Over the weekend, US officials put together a plan to stave off a banking crisis
masse. The US regulators took control of a Silicon Valley bank after it collapsed under the pressure of depositors withdrawing their money.
Just hours after Wall Street opened for trading on Friday morning, US regulators took control of a Silicon Valley bank that collapsed under the pressure of depositors withdrawing their money en masse.
What at first looked like the failure of a one-of-a-kind lender with deep ties to the tech industry, quickly looked like it could be spiraling out of control.
Within 48 hours, regulators were preparing a package of emergency measures to calm panic among depositors and prevent infection in the rest of the banking system. Some of those working on the effort have memories of the response to the coronavirus pandemic in 2020 and the Great Financial Crisis of 2008.
The US government announced on Sunday evening that it would insure all deposits held at SVB and cryptocurrency lender Signature Bank. Signature Bank was also closed by regulators over the weekend. Meanwhile, the Federal Reserve has launched lending facilities that will be available to many other banks in order to ensure that depositors' demands are met.
"The policy actions taken on Sunday were at the very aggressive end of the range of reasonable options that the authorities had," said Krishna Guha, a former employee of the Federal Reserve Bank of New York who is now vice president of Evercore ISI.
On Monday, shares of the First Republic and several other US regional banks were still under heavy selling pressure, despite the initial relief in the US bailout. Many people are now fearing that the government's actions will not be sufficient to prevent further fallout.
The measures announced Sunday were a reminder of the fragility of the pockets of the American financial system, even after regulators spent 15 years implementing a vast new rulebook in the wake of the 2008 crisis.
US regulators and lawmakers realized that the government needed to take bolder action after the Federal Deposit Insurance Corporation took control of the bank just hours after the collapse of the SVB.
"I understand that we have 72 hours to come up with a plan for this disaster," said Ana Echo, a Democratic congresswoman whose district covers much of Silicon Valley. She likened the collapse of the SVB to a financial "earthquake" measuring 7.9 on the Richter scale.
At 1 p.m. on Friday, U.S. Treasury Secretary Janet Yellen placed a call with the officials who will be tasked with crafting the response to her testimony before Congress, according to a person familiar with the conversation. Jay Powell, chair of the Federal Reserve, was on the line, along with Martin Gruenberg, chair of the FDIC, Michael Hsu, acting comptroller of the currency, and Marie Daley, chair of the Federal Reserve Bank of San Francisco.
The discussion among the officials had become more heated by Saturday. Yellen, Powell, and Gruenberg spoke again, this time bringing Michael Barr, the Fed's vice president of supervision, into the conversation. The four officials discussed three options: finding a buyer for SVB, rolling out the new Fed Facility to all banks, and invoking the 'cross-cutting risk' exception for SVB and Signature.
Officials could treat relatively small lenders as if they were systemically important, clearing the way for them to offer a guarantee to all depositors, even those with balances above the $250,000 federal insurance limit.
First of all, government officials and lawmakers have not focused on bailing out SVB but rather on selling it. 'My top priority, which the delegation shared, was finding a buyer but we had a very limited window for that,' Esho said.
The FDIC's attempt to auction the SVB was a failure. Competitors soon realized that they risked big losses if they executed a deal. One banking lobbyist said the FDIC moved too slowly. He added, 'It wasn't obvious to anyone that they were gathering' the information potential buyers would need to make an informed offer.
While potential buyers wanted the government to provide guarantees, Yellen appeared to rule out direct help for banks during her appearance on a news program on Sunday. Although she hinted at a depositor bailout, it is unlikely that this will be enough to quell the fears of potential buyers.
The FDIC invited financial institutions to bid for the failed lender, including PNC Financial Services and the Royal Bank of Canada. The initial deadline was extended to allow the banks to take a closer look at SVB's books, according to people familiar with the negotiations. Both banks decided the deal didn't make sense and pulled out.
It became clear that the FDIC was unlikely to find a buyer as Sunday afternoon approached.
The best way to learn about different cultures is to travel traveling is the best way to learn about different cultures
Amid concerns that the government was ready to let the SVB and uninsured depositors go bankrupt, venture capitalists launched a concerted lobbying effort. Not only would it have major economic ramifications, they argued, as companies struggle to write payrolls, but also that a complete failure would have geopolitical ramifications.
"The theme was: This is not a bank," said one of the people involved in the lobbying campaign. "This is the innovation economy. This is the United States versus China. You can't kill these innovative companies."
"According to Brad Sherman, a California Democratic congressman on the House Financial Services Committee, the government became convinced it had to take aggressive action to restore confidence after the failure of Signature," said Sherman. "A black swan is a black swan. Two black swans flock. Once in the second district [bank] It was closed, that was methodical."
Joe Biden spent the weekend at his home in Wilmington, Delaware. A White House official said that since Friday he has received regular briefings on the evolving situation from two of his top aides who have just taken new positions in the White House: Lyle Brainard, a former vice chairman of the Federal Reserve who recently became director of the National Economic Council; and Jeff Zients, Chief of Staff to the President.
On Saturday, the White House official said, Biden spoke to California Gov. Gavin Newsom 'about efforts to address the situation.'
The break meeting took place Sunday afternoon, when Yellen updated Biden, Brainard and Zients, prompting the president to approve a plan to call in emergency authorities and implement a rescue. Yellen came to the rally armed with recommendations from the Federal Reserve and the FDIC. A few hours later, at 6 p.m., the measures were announced to the public in a joint statement from the organizers.Yellen updated Biden, Brainard, and Zients on the situation Sunday afternoon, which prompted the president to approve a plan to call in emergency authorities and implement a rescue. Yellen came to the rally armed with recommendations from the Federal Reserve and FDIC. A few hours later, at 6 pm, the organizers announced the measures to the public in a joint statement.
The regulators said that today they are taking decisive action to protect the US economy by strengthening public confidence in our banking system.
A senior Treasury official later insisted that the bailout package did not amount to the same bailouts seen during the 2008 crisis, where shareholders and bondholders were helped. Depositors, even those with large balances, were only given guarantees that they would not have enough time to find a buyer. What's even more troubling is that some lenders have similar traits to SVB, meaning operations on other banks had to be prevented.
Boosting confidence in the banking industry was one thing, but shielding the Biden administration from accusations that it bailed out two banks was quite another. Crucially, the measures did not involve using taxpayers' money to protect shareholders, bondholders, or wealthy depositors. The regulators said in the statement that any losses incurred by the Deposit Insurance Fund would be 'recovered through a special assessment of the banks'.
"We thought this was an effective way to end the crisis without angering the public," said a person close to the Biden administration. "Nobody wants to be blamed for hoarding the bank accounts of the rich with taxpayers' money."
It is recommended that you see a doctor.
Instead, the government structured support so that the banking industry would de facto clean up its own mess, said another person advising the government.
Jeff Jackson, a Democratic congressman from North Carolina, said that the Treasury Department hastily held a Zoom call with hundreds of lawmakers, giving them only 15 minutes notice before the virtual meeting began.
"There was no disagreement with the decision to make depositors whole," Jackson wrote on his Substack blog. He noted that both Republicans and Democrats asked a version of the same question: "Will this be enough?"
Although it is still not clear what the answer to this question is, it appears that the emergency package has passed its most important test: As of Monday evening, no more banks have failed. This is despite investors dumping bank stocks and depositors moving cash.
The Biden administration will be on high alert in the coming days and weeks to make sure that remains the case. The president hinted on Monday that there could be more government intervention if the situation gets worse.
"Americans can rest assured that our banking system is secure. Your deposits are safe," he said. "We will not stop there. We will do whatever is required."
in New York
Additional reporting in New York by Lauren Fedor, Arash Massoudi and Courtney Weaver