Run On Bank Was First Sign Of Significant Volatility Amid Rate Hikes
March 14, 2023—U.S. regulators and policymakers acted swiftly over the weekend following the collapse of Silicon Valley Bank on Friday and Signature Bank on Sunday. The runs on the banks by customers are the first signs of major volatility following the Federal Reserve’s multiple rate hikes to reduce inflation.
The government through the Federal Deposit Insurance Corporation provided a risk-exception guarantee for all bank deposits of the two banks. That mitigated the risk of additional runs on banks. The details are as follows:
The FDIC’s guarantee would not apply to investors or unsecured debt holders. Regulators removed senior management of the banks. The FDIC took over Silicon Valley Bank and opened Signature Bridge Bank to take over the deposits and assets of Signature Bank. The Federal Reserve provided additional funding to depository institutions, offering loans of up to one year. Finally, the regulators promised their actions would not cost taxpayers. The Deposit Insurance Fund would cover any costs by putting a special assessment on banks.
Panic And Systemic Risk
If the government had not stepped in to guarantee all deposits, bank customers could have lost holdings more than the insured amount of $250,000 per depositor. That put pressure on companies banking with the financial firms as well as other regional banks.
Across the financial sector, company CEOs released news statements about the soundness of their holdings. Meanwhile, scores of tech companies sent out releases announcing “no exposure” to either bank.
Lobbying Effort By Tech Funders
The moves by federal regulators came after an intense lobbying effort by venture capitalists. According to reporting by the Financial Times, “They argued that it would not only have big economic repercussions, with companies struggling to write paychecks, but also that an outright failure would have geopolitical ramifications.”
Eyes On The Fed
The two bank failures follow the March 8 liquidation of Silvergate Capital Corp., a crypto banking facility.
The added volatility puts pressure on central bankers to stem risk and perhaps adjust their inflation-fighting mitigation efforts. The Fed board meets March 21-22.
The Federal Reserve released a statement Sunday night promising to keep the banking system secure. In addition to the details about the new lending tool it is providing, the Fed said:
“The Board is carefully monitoring developments in financial markets. The capital and liquidity positions of the U.S. banking system are strong and the U.S. financial system is resilient.”
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