RECAP: US authorities including the Fed announced actions to increase confidence in the banking system after the collapse of Silicon Valley Bank (SIVB) and Signature Bank (SBNY)

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Fed announced that it is taking decisive actions to protect the US economy by strengthening public confidence in the bank system and approved actions enabling the FDIC to complete its resolution of Silicon Valley Bank (SIVB). Fed said it is to provide liquidity to US depositary institutions in which each Federal Reserve bank would make advances to eligible borrowers, taking as collateral certain types of securities. Fed said none of the losses by SVB will be borne by the taxpayer and it also declared a similar systemic risk exception for Signature Bank (SBNY) which was closed by its state chartering authority, while it was announced that all depositors will be made whole and will have access to all their money on Monday but shareholders and certain unsecured debt holders will not be protected.

Fed said the core goal of the new program is to ensure bank depositors that their money is safe and there is no topline number on what will be available in the facility, while the aim is to meet demand from banks for liquidity as needed. Furthermore, it stated that the program will dramatically reduce any incentive for depositors to withdraw but owners of the two failed banks will lose their investments.

US President Biden said the Treasury Secretary and National Economic Director reached a solution with banking regulators and the solution avoids putting taxpayer dollars at risk, while he added that American people and businesses can have confidence their bank deposits will be there when they need them, according to Reuters.

US Treasury senior official said the steps on SVB (SIVB) were taken to stabilise the financial system and protect depositors, while they will work with Congress and financial regulators to further strengthen the financial system. The official added that US actions were for Silicon Valley Bank and not the entire holding company and actions taken were aimed at limiting the consequences of deposit outflows and reduce spillover effects.

Pershing Square's Ackman said more banks will likely fail despite the intervention, but we now have a clear roadmap on how the government will manage them.

Canada's Superintendent of Financial Institutions took temporary control of Silicon Valley Bank's Canadian branch, according to a statement.

Recap of Weekend Headlines

Fed and FDIC were said to be mulling a fund that would allow regulators to backstop deposits at banks if more of them fail, according to Bloomberg. Furthermore, CNBC reported that the Fed and FDIC are discussing a backstop to make SVB depositors whole and stem contagion fears with the US financial regulators discussing two different facilities to manage the fallout from the closure of SVB if no buyer materialises.

US lawmakers met with the Fed and FDIC to discuss the collapse of Silicon Valley Bank, while there were comments from Senate Banking Committee’s Mendez that he would not support a government bailout of Silicon Valley Bank.

White House said it has faith in regulators and that regulators will use tools necessary in the banking system, while it also commented that the US banking system has to hold more capital than it used to and has built more resilience to withstand shocks when asked about SVB Bank.

US Treasury Secretary Yellen said the collapse of SVB is clearly a concern and noted that she has been working all weekend with regulators to design appropriate policy but can’t provide further details at this time. Yellen stated that they want to make sure troubles at one bank cannot create contagion to others but are certainly not looking at repeating bank bailouts of the past, while she added people should feel confident the banking system is safe and sound.

US government is reportedly expected to make a material announcement on Sunday to shore up deposits in Silicon Valley Bank and it was also reported that the Fed is discussing easing access to the Discount window to help banks, according to Reuters.

Regional banks are most likely to prevail in the SVB sale process and large lenders such as JPMorgan Chase and Bank of America are likely to not be in the running to absorb SVB, while an ideal bidder would likely be a regional bank like PNC Financial, US Bank, Truist or Capital Bank, according to The Information. Furthermore, it was also reported that PNC Financial Group and Royal Bank of Canada were early suitors for Silicon Valley Bank but their interest has cooled, according to sources cited by Reuters.

BoE said on Friday that it is to apply to the court to place Silicon Valley Bank UK Limited into a bank insolvency procedure and that SVBUK’s other assets and liabilities will be managed in the insolvency by the bank liquidators. BoE noted that SVBUK has a limited presence in the UK and no critical functions supporting the financial system, while the firm will stop making payments or accepting deposits in the interim, according to Reuters.

UK PM Sunak said he does not believe there is a systemic contagion risk from the Silicon Valley Bank collapse, while he added that they recognise the anxiety and will make sure to find a solution that secures people’s operational liquidity and cashflow needs, according to Reuters. Furthermore, PM Sunak said that he will have something to say very shortly on SVB.

UK Chancellor Hunt said the UK is working at pace to minimise the fallout from the collapse of Silicon Valley Bank and will bring forward immediate plans to help SVB UK customers with cash flow needs, while Hunt said that they will come forward with solutions over SVB and that they want to find a solution that minimises or possibly avoids all losses for customers, according to Reuters.

SVBUK had nearly GBP 7bln in deposits when the BoE deemed it insolvent on Friday and the government seeks to tap Middle East money to buy out Silicon Valley Bank unit, according to FT. it was also reported that Bank of London submitted a formal proposal for the UK arm of Silicon Valley Bank, while a separate report noted that HSBC (5 HK) emerged as a potential bidder as the government races to secure an 11th-hour rescue of Silicon Valley Bank UK, according to Reuters and Sky News.

Analysis details (05:34)

• The announcement of action to boost confidence in the banking system underpinned US equity futures, while the mood in Asia remained mixed as financials were hit in the fallout from the bank collapses stateside. Nonetheless, there was downward pressure on yields amid expectations for a less aggressive Fed with Goldman Sachs now forecasting a pause at next week's FOMC meeting, while the CME Fed Watch Tool still points to a 25bps hike but no longer sees any possibility for a 50bps move and money markets are also now pricing a terminal rate of below 5.10%. 


• Elsewhere, the recent turmoil in the banking industry has also resulted in money markets pricing a 77% chance that the RBA pauses at its next meeting in April. 

13 Mar 2023 - 05:24- Fixed IncomeEconomic Commentary- Source: Newsquawk