Los Angeles Times

Feds reassure failed lender’s clients

Acting to stop a larger crisis, officials say funds in Silicon Valley Bank can be accessed.

- By Ken Sweet, Christophe­r Rugaber, Chris Megerian and Cathy Bussewitz

The U.S. government took extraordin­ary steps Sunday to stop a potential banking crisis after the historic failure of Silicon Valley Bank, assuring those who had made deposits at the failed financial institutio­n that they would be able to access all of their money quickly, even as another major bank was shut down.

The announceme­nt was made hours before stock trading reopened in Asia, and amid fears that the factors behind the collapse of the Santa Clara, Calif., lender could spread and affect other institutio­ns. Regulators had worked all weekend to come up with a buyer for the bank, but as of Sunday evening those efforts appeared to have failed.

In a sign of how quickly the financial hemorrhage was occurring, regulators announced that New Yorkbased Signature Bank had failed and was being seized on Sunday. With more than $110 billion in assets, Signature is the third-largest bank to fail in U.S. history.

To shore up confidence in

the banking system, the U.S. Treasury Department, Federal Reserve and Federal Deposit Insurance Corp. said Sunday that all Silicon Valley Bank clients would be protected and have access to their funds. Officials also announced measures to prevent more bank runs.

The plan “will ensure that the U.S. banking system continues to perform its vital roles of protecting deposits and providing access to credit to households and businesses in a manner that promotes strong and sustainabl­e economic growth,” the agencies said in a joint statement.

Under the plan, those who had deposited money at Silicon Valley Bank or Signature Bank, including those whose holdings exceed the $250,000 insurance limit, will be able to access their money on Monday.

In a separate move Sunday, the Federal Reserve announced the creation of an expansive emergency lending program to help prevent a wave of bank runs that would threaten the stability of the banking system and the economy as a whole.

Officials at the Fed characteri­zed the program as akin to what central banks have done for many decades: Lend freely to the banking system so that customers are confident that they can access their accounts whenever needed.

The program’s emergency lending facility will allow banks to borrow from the Fed to pay depositors, rather than having to sell Treasuries and other securities to raise cash. Silicon Valley Bank had to dump some of its Treasuries at a loss to cover customers’ withdrawal­s. Under the new program, banks can post those securities as collateral and borrow from the emergency facility.

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 did not expect to have to use any of that money because the securities posted as collateral have a low risk of default.

Analysts said the program should be enough to calm financial markets on Monday.

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

Though Sunday’s steps marked the most extensive government interventi­on in the banking system since the 2008 financial crisis, its actions are limited compared with the response 15 years ago. The two failed banks themselves have not been rescued, and taxpayer money has not been provided to them.

“Amazing news, and exactly what I expected, but Silicon Valley lives with investor confidence and I’m still hoping POTUS will appear on TV ... and assure the world that everything is fine,” said Moaz Hamid, a venture capitalist and longtime client of Silicon Valley Bank.

President Biden told reporters Sunday evening that he would speak about the bank situation on Monday. He also issued a statement saying he was “firmly committed to holding those responsibl­e for this mess fully accountabl­e and to continuing our efforts to strengthen oversight and regulation of larger banks so that we are not in this position again.”

Regulators had to rush Friday to close Silicon Valley Bank, which had over $200 billion in assets, when it experience­d a run of clients rushing to withdraw their money all at once. It is the second-largest bank failure in U.S. history, behind the 2008 failure of Washington Mutual.

Some prominent executives in Silicon Valley feared that if Washington didn’t rescue the failed bank, customers would make runs on other financial institutio­ns in the coming days. Stock prices plunged over the last few days at other banks that cater to technology companies, including First Republic Bank and PacWest Bank.

Silicon Valley Bank began its slide into insolvency when its customers — largely technology companies that needed cash as they struggled to get financing — started withdrawin­g their deposits. The bank had to sell bonds at a loss to cover the withdrawal­s.

U.S. Treasury Secretary Janet L. Yellen described interest rates, which the Federal Reserve has increased to combat inflation, as the core problem for Silicon Valley Bank. Many of the bank’s assets, such as bonds or mortgage-backed securities, lost market value as interest rates climbed.

Then-FDIC chair Sheila Bair recalled that with almost all of the bank failures during the 2008 financial crisis, “we sold a failed bank to a healthy bank. And usually, the healthy acquirer would also cover the uninsured because they wanted the franchise value of those large depositors. So optimally, that’s the best outcome.”

But she told NBC’s “Meet the Press” that with Silicon Valley Bank, the problem “was a liquidity failure — it was a bank run — so they didn’t have time to prepare to market the bank. So they’re having to do that now, and playing catch-up.”

‘Monday will surely be a stressful day ... but today’s action dramatical­ly reduces the risk of further contagion.’ — Economists at Jefferies, on the federal government’s response to bank failures

Sweet, Rugaber, Megerian and Bussewitz write for the Associated Press. Rugaber and Megerian reported from Washington and Sweet and Bussewitz from New York. Times staff writer Jeff Bercovici in Berkeley and AP staff writers Hope Yen in Washington and Jennifer McDermott in Providence, R.I., contribute­d to this report.

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