'It's over. Phew!': How the US protected Silicon Valley Bank & Signature Bank's depositors

The trial is finally over for Silicon Valley Bank and Signature Bank depositors, following their collapse.

A joint statement released by Secretary of the Treasury Janet L Yellen, Federal Reserve Board Chair Jerome Powell, and FDIC Chairman Martin J Gruenberg said that the Federal Deposit Insurance Corporation (FDIC) will complete its resolution of Silicon Valley Bank in a manner that fully protects all depositors. “Depositors will have access to all of their money starting Monday, March 13. No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer,” the statement added. The same goes for Signature Bank that was closed on Sunday by the state chartering authority. 

Capitalmind founder and CEO Deepak Shenoy, in a series of tweets, has explained how the Fed will use the deposit insurance pool and not taxpayer money to foot the losses of the depositors. He also shared details of the Bank Term Funding Program that will provide liquidity to US depository institutions with each Federal Reserve Bank making advances to eligible borrowers taking as collateral certain types of securities. Any US federally insured depository institution or US branch or agency of a foreign bank eligible for primary credit will be eligible to borrow. The rate for term advances will be the one-year overnight index swap rate plus 10 basis points. The collateral valuation will be par value. The Department of the Treasury would use the Exchange Stabilization Fund to provide $25 billion as credit protection to the Federal Reserve Banks under this programme. Advances under this program can be requested until March 11, 2024.

Shenoy said that this decision to use the deposit insurance pool is actually soothing and politically more palatable. “Founders who are stuck can breathe,” he said, elaborating that this will somewhat remove the fear but they will have to take their banking elsewhere. 

Start-ups and VCs can set up better practices for diversification of funds, said Shenoy. “Collateral is high quality stuff valued at par, not the 20 per cent lower market value. Even overnight discount window will use par rather than market value for last resort. This is big!” he said. 

Shenoy explained that systemic risk is controlled with this decision. He stated that such a thing in Europe would be devastating as their banks have higher credit risk, more leverage and an economy that is not comparable to the US.

“The flip side: if inflation is high, rate hikes continue. Banks have excess reserves even now so liquidity doesn't help any bank that isn't in trouble,” said Shenoy. 

The Federal Reserve System statement added that shareholders and certain unsecured debt holders will not be protected, and that the senior management has also been removed. The Fed board also announced the additional funding for eligible depository institutions.

“The US banking system remains resilient and on a solid foundation, in large part due to reforms that were made after the financial crisis that ensured better safeguards for the banking industry,” said the statement. 

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Also read: ‘More banks to likely fail despite the intervention’: Bill Ackman on Silicon Valley Bank crisis