US marshalling ‘material action’ to stem SVB fallout -sources

by mcardinal

U.S. authorities were preparing “material action” on Sunday to shore up deposits in Silicon Valley Bank (SVB) and stem any broader financial fallout from its sudden collapse, sources familiar with the matter told Reuters.

Biden administration officials worked through the weekend to assess the impact of startup-focused lender SVB Financial Group’s failure on Friday, with a particular eye on the venture capital sector and regional banks, the sources said.

Details of the announcement expected on Sunday were not immediately available. One source said the Federal Reserve had acted to keep banks operating during the COVID-19 pandemic and could take similar action now.

“This will be a material action, not just words,” one source said.

Earlier, U.S. Treasury Secretary Janet Yellen said that she was working with banking regulators to respond after SVB became the largest bank to fail since the 2008 financial crisis.

As fears deepened of a broader fallout across the U.S. regional banking sector and beyond, Yellen said she was working to protect depositors but ruled out a bailout.

“We want to make sure that the troubles that exist at one bank don’t create contagion to others that are sound,” Yellen told the CBS News Sunday Morning show.

“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 we are not going to do that again,” Yellen added.

In March 2020, as the onset of the coronavirus pandemic and lockdowns triggered financial panic, the U.S. Federal Reserve announced a series of actions to keep credit flowing by lowering borrowing costs and lengthening the terms its direct loans.

By the end of that month, use of the so-called discount window facility shot up to more than $50 billion in credit provided by the Fed.

Through the middle of last week, before Silicon Valley’s collapse, there had been no indications of usage picking up, with Fed data showing weekly outstanding balances of $4 billion to $5 billion since the start of the year.


Although the Federal Deposit Insurance Corporation (FDIC) protects deposits of up to $250,000, there are worries about deposits above this, one source said, adding that many smaller businesses were at risk of being unable to pay staff.

And amid increased withdrawals from other regional banks, U.S. officials are also keeping close watch on the wider sector.

More than 3,500 CEOs and founders representing some 220,000 workers have signed a petition started by Y Combinator appealing directly to Yellen and others to backstop depositors, warning that more than 100,000 jobs could be at risk.

With $209 billion in assets, the Santa Clara, California-based lender was the 16th largest U.S. bank, making the list of potential buyers who could pull off a deal relatively short.

The FDIC, which was appointed receiver, was trying to find another bank willing to merge with SVB, people familiar with the matter said on Friday.

Some industry executives said such a deal would be sizeable for any bank and would likely require regulators to give special guarantees and make other allowances.

U.S. House of Representatives Speaker Kevin McCarthy told Fox News’ Sunday Morning Futures program that President Joe Biden’s administration and the U.S. Federal Reserve were working to come up with an announcement before markets open on Monday.

The Fed and FDIC did not immediately respond to a request for comment.


Some analysts and prominent investors warned that without a resolution by Monday, other banks could come under pressure.

The Fed and the FDIC were weighing the creation of a fund that would allow regulators to backstop more deposits at banks that run into trouble, Bloomberg reported.

Regulators discussed a new special vehicle in conversations with banking executives and hoped such a measure would reassure depositors and help contain any panic, the report said.

“The good news is it is unlikely an SVB-style bankruptcy will extend to the large banks,” risk and financial advisory firm Kroll said in a research note.

But small community banks could face issues and the risk is “much higher if uninsured depositors of SVB aren’t made whole and have to take a haircut on their deposits,” Kroll added.

Billionaire hedge fund manager Bill Ackman said in a tweet on Saturday that failure to protect all depositors could lead to the withdrawal of uninsured deposits from other institutions.

“These withdrawals will drain liquidity from community, regional and other banks and begin the destruction of these important institutions,” Ackman, who said he does not have direct exposure, warned.

The S&P 500 regional banks index dropped 4.3% on Friday to end the week down 18%, its worst week since 2009. Signature Bank dropped about 23%, while San Francisco-based First Republic Bank fell 15%. Western Alliance Bancorp dropped 21% and PacWest Bancorp slid 38%. Charles Schwab fell more than 11%.

Signature Bank, First Republic Bank, PacWest Bank and Charles Schwab did not immediately respond to requests for comment. Western Alliance Bank declined to comment.

Some banks could look to preemptively raise capital to fortify their balance sheets or try to strike deals of their own, industry executives said. When IndyMac and Washington Mutual collapsed in 2008, the FDIC found other firms to take on the assets and keep deposits intact. If no buyer is found for SVB, uninsured depositors will probably be left with a portion of whatever funds the FDIC can raise by selling off the bank’s assets.


In Britain, where SVB has a local subsidiary, finance minister Jeremy Hunt said on Sunday he was working with Prime Minister Rishi Sunak and the Bank of England to “avoid or minimize the damage” resulting from the chaos.

“We will bring forward very soon plans to make sure people are able to meet their cash flow requirements to pay their staff,” Hunt told Sky News.

More than 250 British tech firm executives signed a letter on Saturday calling for government intervention, a copy seen by Reuters shows.

Advisory firm Rothschild & Co is exploring options for Silicon Valley Bank UK Limited, two people familiar with the talks told Reuters on Saturday. The BoE has said it is seeking a court order to place the UK arm into an insolvency procedure.

Copyright 2023 Thomson/Reuters