Bank rescue buys stability at a high price

If depositors think they’ll be bailed out unconditionally they have no need to cause a run. And if the bank doesn’t face a run, it ought to have no need to sell assets in a hurry

John FoleyJohn Foley
Published : 13 March 2023, 08:00 AM
Updated : 13 March 2023, 08:00 AM

The biggest US banks are so tied up in regulatory red tape that they couldn’t cause a crisis if they tried. The 16th largest, though? That’s a different story, based on Sunday’s dramatic rescue of the financial system. Swift action by US agencies has stopped what could have been a crisis, but at a cost.

Silicon Valley Bank’s failure has prompted a weekend intervention by the Federal Reserve, Department of the Treasury and Federal Deposit Insurance Corp. They swooped in to reassure depositors of the midsized lender and launched a new funding facility for institutions short of cash. Along the way, they also closed down another struggling lender, Signature Bank of New York.

The two-part package helps to resolve SVB and Signature, but also reassures nervous depositors that still-living peers are safe. First, the FDIC will reimburse all of the two banks’ depositors, not just those whose balances are within the $250,000 guaranteed limit. In the event that the bank’s assets, after a sale, are below the value of the deposits, that cost will be spread among all FDIC-insured banks. It’s unorthodox, but necessary. SVB’s failure, which left companies like crypto firm Circle unable to access their cash, had sent a loud signal that large deposits aren’t safe in smaller banks. Without an implicit guarantee for everyone, Monday could have brought new bank runs.

Second, the Fed will start lending to banks against certain investments they hold, but based on the securities’ face value, not their market prices. In other words, banks that need to raise cash won’t have to sell Treasuries or federally-backed debt at a loss as SVB did, so long as they’re in reasonable standing. Again, it’s a break from the norm. The Fed normally applies a “haircut” to assets that banks want to borrow against through its discount window facility. And while the new Bank Term Funding Program, at a cost of around 5%, is much higher than the nearly-nothing banks pay for most of their deposits, it is hardly punitive.

As always, anti-crisis measures are there to be seen, not to be used. If depositors think they’ll be bailed out unconditionally they have no need to cause a run. And if the bank doesn’t face a run, it ought to have no need to sell assets in a hurry. In that sense, the regulators can say that they have done what was necessary.

Still, all of this comes at a price. Authorities have shown that they failed to tackle the problem of banks being too big to fail. Legislation after the 2008 crisis was designed so that big firms could in theory go under without taking the whole system with them. The biggest banks are forced to write so-called living wills; examiners pore over their every trade; even their WhatsApp messages aren’t safe from prying eyes. Smaller banks – including SVB and Signature, whose combined assets were just one-tenth the size of JPMorgan – received a much lighter regulatory burden, for reasons that are both pragmatic and political. With hindsight, that may have been a mistake.


Financial authorities teamed up on Mar 12 to protect the depositors of failed US lender Silicon Valley Bank. The US Federal Reserve, Federal Deposit Insurance Corp and the US Department of the Treasury said that depositors in SVB would have access to their money starting on Mar 13, three days after the bank, owned by SVB Financial, was closed by watchdogs. They added that no losses would be borne by the taxpayer.

The authorities also said that Signature Bank, a New York-based lender, was also closed on Mar 12. As with SVB, the authorities said depositors would be made whole, but that shareholders and certain unsecured debtholders would not be protected, and management had been removed.

The Fed simultaneously unveiled a facility that would let banks borrow against assets including Treasuries and government-backed debt, called the Bank Term Funding Program. This would lend against the full value of the assets, even if they are trading in the market at less than face value.

The author is a Reuters Breakingviews columnist. The opinions expressed are their own