SVB, Signature Bank Depositors to Get All Their Money as Fed Moves to Stem Crisis

Regulators take control of a second bank and race to roll out emergency measures

U.S. regulators took control of a second bank Sunday and announced emergency measures to ease fears depositors might pull their money from smaller lenders after the swift collapse late last week of Silicon Valley Bank.

The measures, which include guaranteeing all deposits of SVB, were designed to shore up wavering confidence in the banking system. They were jointly announced Sunday night by the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp.

Regulators announced they had taken control of Signature Bank, one of the main banks for cryptocurrency companies, on Sunday. The New York bank’s depositors will be made whole, officials said.

A senior Treasury official said the steps didn’t constitute a bailout because stock and bondholders in SVB and Signature wouldn’t be protected.

The Fed and Treasury separately said they would use emergency-lending authorities to make more funds available to meet demands for bank withdrawals, an additional effort to prevent runs on other banks.

“This should be enough to stop the depositor panic,” said William Dudley, who served as president of the New York Fed from 2009 to 2018. “What it tells you is that risks to the financial system are not just tied to the big money-center banks.”

Officials took the extraordinary step of designating SVB and Signature Bank as a systemic risk to the financial system, which gives regulators flexibility to guarantee uninsured deposits.

Officials said that depositors at SVB will have access to all of their money on Monday.

The government’s bank-deposit insurance fund will cover all deposits at the two banks, rather than the standard $250,000. Federal regulators said any losses to the government’s fund would be recovered in a special assessment on banks and that the U.S. taxpayers wouldn’t bear any losses.

In a separate statement Sunday night, the Fed said it “is closely monitoring conditions across the financial system and is prepared to use its full range of tools to support households and businesses, and will take additional steps as appropriate.”

The central bank said it would make additional funding available to banks through a new “Bank Term Funding Program,” which will offer loans of up to one year to banks that pledge U.S. Treasury securities, mortgage-backed securities and other collateral. Up to $25 billion from the Treasury’s exchange-stabilization fund will backstop the Fed lending program.

Many of those securities have fallen in value as the Fed has raised interest rates. The terms would allow banks to borrow at 100 cents on the dollar for securities trading potentially well below that value, potentially putting the government at risk of losses incurred by banks. Critics said the move would essentially offer a backdoor subsidy to bank investors and management for failing to properly manage interest-rate risks.

Those terms are more generous than typical emergency bank loans of up to 90 days offered through the Fed’s main “discount window” borrowing program. The program could signal that banks that face withdrawals won’t have to liquidate securities and take losses to raise cash.

Another lender, First Republic Bank FRC, said Sunday it had shored up its finances with additional funding from the Fed and JPMorgan Chase & Co. The fresh funding gives the bank $70 billion in unused liquidity, excluding funds it is eligible to borrow through the new Fed lending facility.

First Republic caters to wealthy clients with big balances in excess of the FDIC insurance cap. Investors worried that the bank could be vulnerable to a run like the one that claimed Silicon Valley Bank. First Republic’s shares had fallen about 30% since Wednesday.

Sunday evening’s announcement capped a frantic weekend during which regulators were auctioning the failed Silicon Valley Bank. Regulators struggled to find a buyer on Sunday and pivoted to backstopping the deposits, according to a senior Treasury official, as they sought to announce a resolution to depositors by Monday morning.

Federal Reserve Chair Jerome Powell scrapped plans to attend a regular meeting of central bankers in Basel, Switzerland, on Sunday and instead stayed in Washington to manage the crisis response.

The $110 billion Signature and $209 billion SVB are the highest-profile casualties of the Fed’s campaign to slow the economy and bring inflation down. The central bank has raised interest rates by 4.5 percentage points over the past year, the most rapid run-up since the early 1980s, and officials have signaled more increases are likely.

Soothing nerves about access to uninsured bank deposits allows the Fed to stay more tightly focused on combating inflation by raising interest rates. Before the failure of SVB last week, officials had signaled they were on track to raise rates by at least a quarter-percentage point, as they did last month, at their next meeting, March 21-22.

“If this is limited to a relatively few number of banks and the underlying problem is not innate in the economy like it was during the global financial crisis, then I don’t think there is a strong case for the Fed to stop hiking,” said Mr. Dudley.

At the same time, heavy-handed federal interventions could amount to an embarrassing coda for a rollback of post-financial-crisis regulations on small and midsize banks undertaken in recent years. Officials on Sunday signaled they would likely weigh tougher capital requirements and liquidity rules, reversing at least some of the steps taken during the Trump administration to ease restrictions on smaller banks.

“We learned today that a $200 billion bank was too big to fail—or at least too big to be allowed to fail with losses borne by large depositors, as the bank resolution system assumes,” said Daniel Tarullo, a former Fed governor who was the central bank’s point person on regulation following the financial crisis. “While I understand the government’s concern about economic fallout, today’s actions strike me as having major implications for financial regulation.”

Federal regulators are trying to balance their desire to prevent broader financial contagion while avoiding the damaging political optics of bailing out financial institutions at taxpayer expense. The new lending programs didn’t include restrictions on compensation for bank executives.

Biden administration officials said repeatedly on Sunday that their moves were aimed at protecting depositors, allowing them to make payroll this week, and would come at no cost to taxpayers. A senior Treasury official said the Fed’s lending program would prevent further bank runs.

“I am firmly committed to holding those responsible for this mess fully accountable and to continuing our efforts to strengthen oversight and regulation of larger banks so that we are not in this position again,” President Biden said in a statement.

Nicholas Donahue, the co-founder of real-estate startup Atmos, said he was set to finalize a loan from Khosla Ventures to help make payroll payments for the coming week when he heard the news.

“I’m feeling relieved, the fact that I can go back to my team tonight and say the business will be fine,” Mr. Donahue said. “There’s just a lot of weight off of my shoulders.”

Signature is one of a handful of banks that went big on crypto, providing accounts and other services to crypto startups and big investors in digital assets. It ultimately became one of the crypto market’s leading banks.

That focus and a bespoke payments system for crypto companies helped the bank more than double deposits in two years. In early 2022, some 27% of its deposits were from its digital-asset clients.

The bank’s exposure to crypto became a problem as the year wore on. A market rout that deepened following the November collapse of Sam Bankman-Fried’s crypto exchange, FTX, drained billions of dollars in deposits.

Signature shares fell 23% on Friday, its worst day since it went public in 2004. The bank had $110 billion in assets, and $88.6 billion in deposits as of the end of 2022.

SVB faced its own unique set of challenges. Deposits at the bank surged after the pandemic, and federal policy response left tech companies flush with cash in 2021. The Santa Clara, Calif.-based lender saw total deposits mushroom to nearly $200 billion by March 2022, up from more than $60 billion two years earlier.

Because it invested much of that cash in longer-dated securities whose values have fallen as interest rates have shot up, it risked larger losses if it had to liquidate its securities portfolio. At the same time, its depositors were heavily concentrated in the tightknit world of startups and venture-capital firms, leaving the bank uniquely vulnerable to a run.

A slowdown in tech over the past year, together with rising deposit costs, meant more of its venture-capital-backed customers were burning cash or pulling deposits.

Startups yanked funds more aggressively last week to avoid potential losses on deposits in excess of the $250,000 limit insured by the federal government. Those withdrawals, encouraged by some venture investors, sparked a classic bank run that ended with the FDIC stepping in on Friday.

The speed with which SVB collapsed stunned analysts. The bank was closed on Friday morning; typically, regulators attempt to close failing banks at the end of the week and announce a sale of the banks’ assets at the same time, using the weekend to transfer accounts.