While the unique cases of SVB, SBNY and SIVB may be unnerving, we do not feel that they represent the tip of the iceberg of another financial crisis. It is not unusual for the Fed rate hike cycle to uncover cracks in the riskier sectors of the economy. However, with the help of your PWA advisor, creating a thoughtful plan and a sound strategy, you can feel secure in the knowledge that your assets are well protected.
In response to the threat of deposit withdrawals leading to liquidity issues at banks, the Federal Reserve on Sunday announced the creation of a new Bank Term Funding Program (BTFP) to be accessed by all U.S. depository institutions. The new program will offer loans up to a year in duration with assets that are eligible for Federal Reserve Bank open market operations as collateral to access the facility. The Fed’s program will be backstopped with $25 billion from the Treasury’s Exchange Stabilization Fund (ESF), which the Fed at this stage does not foresee needing to be tapped. The action by the Fed with full coverage for uninsured depositors at SIVB removes some near-term uncertainty about the fate of depositors and will provide a degree of confidence to markets that regulators will act to stem the spread of deposit outflows in order to avoid a systemic event.
The Federal Reserve and the FDIC, while consulting with the President, has used a “systemic risk exception” to fully insure the deposits of SIVB and SBNY. At the time of writing, the federal banking regulators are still working on a sale of these banks, but according to press reports, have begun an auction process. Any cost of fully insuring these deposits will come from a special assessment of FDIC insured depositories – which will be a hit to industry earnings (the FDIC was already in the process of increasing insurance premiums to shore up the Deposit Insurance Fund). Equity holders of the two banks are now unsecured creditors and management teams have been removed. These actions will allow the regulators to claim that there were no bailouts and they moved to secure the safety and soundness of the financial system from further contagion.