Federal Reserve, FDIC and Treasury Department Move to Stop SVB Contagion from Spreading

Barry Adams
13 Mar, 2023
New York City

Stocks gyrated in early trading following a flurry of weekend activities as regulators and central bankers worked together to prevent the bank contagion run from spreading. 

Federal Reserve and Treasury Department officials worked on the weekend to work out details of the plan to provide financial assistance to the failed Silicon Valley Bank. 

Regulators agreed to provide "financial backstop" to open the bank on Monday morning so the insured and uninsured depositors can access their accounts in full. 

However, the stock and bondholders of the bank will not be bailed out, clarified the U.S. Treasury Secretary Janet Yellen in an interview with CBS Face the Nation.  

The Federal Depositors Insurance Corporation, the insurance company that protects bank depositors, agreed to provide additional funds to support insured and uninsured accounts with the Silicon Valley Bank. 

The move essentially makes sure that the losses from the fallout are paid by the banking industry and Wall Street and not the federal government. 

The Federal Reserve also set up a separate program, Bank Term Lending Facility to provide additional lending and extended term facility to one-year from the traditional 90 days in exchange of higher quality collateral valued at par and not at market value. 

The additional banking facility is designed to provide emergency lending to banks that may need access to cash and prevent bank runs from spreading to other institutions. 

The moves from the FDIC, Federal Reserve and the Treasury departments were widely welcomed by investors on Wall Street and depositors on Main Street. 

"Shareholders and certain unsecured debtholders will not be protected. Senior management has also been removed. 

Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law," noted the joint statement released by Secretary of the Treasury Janet L. Yellen, Federal Reserve Board Chair Jerome H. Powell, and FDIC Chairman Martin J. Gruenberg. 

 

Indexes & Yields 

The S&P 500 index declined 0.1% to 3,856.48 and the Nasdaq Composite index increased 0.1% to 11,151.52. 

The yield on 2-year Treasury notes traded down to 4.03%, 10-year Treasury notes declined to 3.45% and 30-year Treasury bonds to 3.85%. 

Crude oil declined $1.02 to $75.65 a barrel and natural gas rose 18 cents to $2.61 a thermal unit. 

 

Stock Movers 

Regional and mid-sized banks with large uninsured deposits led the decline for the third day in a row despite the additional assistance provided by the Federal Reserve Bank. 

First Republic Bank plunged 75.6% to $19.95 and the San Francisco-based bank said on Sunday it has received "additional liquidity" from the Federal Reserve Bank and JPMorgan Chase & Co. 

"The total  available, unused liquidity to fund operations is now more than $70 billion. This excludes additional  liquidity First Republic is eligible to receive under the new Bank Term Funding Program announced by  the Federal Reserve today," the bank said in a filing with the SEC on Sunday. 

 “First Republic’s capital and liquidity positions are very strong, and its capital remains well  above the regulatory threshold for well-capitalized banks," added Jim Herbert, Founder and Executive Chairman and Mike Roffler, CEO and President. 

PacWest Bancorp headquartered in Los Angeles, California dropped 42.43% to $7.11 and the Phoenix, Arizona based Western Alliance Bancorp plunged 69% to $15.20. 

JPMorgan Chase decreased 1.6% to $131.60 and Bank of America fell 3.3% to $29.27.