The US government justifies the sweeping bailouts following the collapse of Silicon Valley Bank (SVB) by pointing out that taxpayers are not liable for any losses and that the bank managers responsible will be held accountable.
Winand von Petersdorff-Campen
Economic correspondent in Washington.
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President Joe Biden said Monday that Americans can trust that the banking system and deposits are safe. The British subsidiary of SVB went to the major bank HSBC for a symbolic British pound after long negotiations between the Bank of England and the British government.
Despite the government's assurances, investors distrust the financial sector. After SVB, the focus is now on First Republic Bank. It has a similar client base and investment portfolio to the collapsed SVB. In pre-market trading, the prices of the financial institution fell by 60 percent. When the price continued to collapse in the first few minutes after the regular market opening on Wall Street, trading was suspended.
On Sunday, the bank had announced that it had secured liquidity through the Federal Reserve and the major bank JP Morgan Chase. Numerous medium-sized financial institutions lost between 10 and 40 percent before the IPO. The big banks fared much better. Bank of America shares lost 4 percent in the premarket, while Wells Fargo's stock fell 3 percent.
Package put together at the weekend
At the weekend, the US Treasury had put together a rescue package with the Federal Reserve and the FDIC, which promised banks with fragile portfolios liquidity assistance and fully protected the account holders with the collapsed SVB. At the same time, New York bank supervisors shut down Signature Bank, which was heavily involved in the cryptocurrency industry. Biden announced that he wanted to advocate in Congress for stricter regulatory requirements for smaller banks. Last week, Silvergate Bank, which is central to the crypto industry, had already ceased its business and agreed to a liquidation.
The rescue measures of the American government have two central elements: It declared SVB and the cryptobank Signature to be systemically important. This cleared the legal way to protect customer deposits not only up to the state limit of $ 250,000, but the entire amount. Many SVB bank customers had balances in the millions. Well-known financial investors from Silicon Valley had campaigned aggressively to completely secure the funds so as not to nip the Facebooks and Googles of tomorrow in the bud. The same rule applies to Signature Bank.
Fed Credit Line
The second element is a Fed line of credit backed by the Treasury. The banks can tap into the credit line and secure loans for a term of one year. You have to give bonds as collateral for this. The trick here is that the bonds are not valued at their market value, but at their book value. After the interest rate turnaround, government bonds and mortgage bonds, which many banks hold, have lost a lot of value.
The FDIC estimates that American banks had about $2022 billion in unrealized losses from such bonds on their books in 620. With this measure, the US Federal Reserve is moving away from the principle of making refinancing by the Fed as expensive as possible, so that the institutions do not become too dependent on central bank money.
Medium-sized banks had long and successfully campaigned to be spared excessively strict regulation, arguing that they were not systemically important. Biden announced that he would urge Congress and regulators to tighten regulation to make similar collapses less likely in the future.