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Damage control by regulators in the wake of SVB and Signature Bank collapses

The failure of two banks with a combined $264 billion in deposits sparked action over the weekend from the White House, the Department of the Treasury, and other federal banking regulators to avert a full-blown economic crisis.

The announcement that all client deposits at Silicon Valley Bank ($175 billion in deposits) and New York-based Signature Bank ($89 billion) will be completely protected was made on Sunday by the Treasury, Federal Reserve Board, and Federal Deposit Insurance Corporation (FDIC). Silicon Valley Bank (SVB) was shut down by the FDIC and California banking regulators on Friday; Signature Bank was shut down by the FDIC and New York State Department of Financial Services on Sunday.

Is this regulatory action to guarantee depositors a bailout? Depends on who you ask.  On Bloomberg TV on Monday, analysts referred to the action as a "bail in," which is defined by the Bank of England as utilizing investor funds rather than public funds to absorb losses when a corporation fails.

According to a Reuters article, almost 89% of SVB's deposits were not covered by insurance. The situation at Signature Bank, where nine-tenths of its deposits were uninsured at the end of 2022, was largely the same. Both banks had concentrated holdings in specific sectors: New York real estate for Signature and technology firms for SVB.

The FDIC's policy that only the first $250,000 of any bank account would be insured by the organization in the case of a bank failure is at the crux of the argument over insured versus uninsured deposits.

However, "systemic risk exception(s)" to that clause for both failing banks were announced on Sunday by the FDIC, Fed, and Treasury, ensuring that all depositors would be compensated. The authorities promised they would not use public funds for this, and President Joe Biden emphasized that in remarks on Monday.

"No losses will be borne by the taxpayers," according to Biden. "Instead, the money will come from the fees that banks pay into the Deposit Insurance Fund."

"Because of the actions that our regulators have already taken, every American should feel confident that their deposits will be there if and when they need them."

The regulators underlined that senior managers at both banks have been fired, and that shareholders and some unsecured debtholders will not be protected. While the FDIC searches for buyers, the banks can carry on with their regular banking and lending operations thanks to receiver banks that the agency set up.

On Monday, HSBC purchased SVB's U.K. division.

The Fed also announced Sunday it will make additional cash available to depository institutions, "to help assure banks have the ability to meet the needs of all their depositors," through a new Bank Term Funding Program. In order to give institutions "an additional source of liquidity against high-quality securities, eliminating an institution’s need to quickly sell those securities in times of stress," the program will offer loans with terms of up to a year.

Both banks collapsed due to regulatory shortcomings, most notably the Fed's failure to monitor the risk profiles of regional banks that were not deemed "too big to fail."

In order to detect risks and the potential effects of unfavorable financial and economic conditions on the covered institution's capital adequacy, the Dodd-Frank Act of 2010 mandated that banks with more than $10 billion in assets carry out yearly stress tests. With the relaxation of this requirement in 2019, only banks with assets of $250 billion or more were required to do annual stress tests.

According to banking regulators, just 23 financial firms with a "large global footprint" will be needed to perform the entire series of annual stress tests in 2023.

A Wall Street watchdog group called Better Markets demanded that bankers and regulators be held responsible for the failure of SVB.

"SVB’s executives must be sanctioned for their gross mismanagement, if not reckless and illegal conduct, and the board of directors for their deficiencies, negligence, or worse," said Dennis Kelleher, president and chief executive of Better Markets, in a statement on Monday. "… The bank undertook enormous, unreasonable risks, and the Fed failed to identify and require those risks be mitigated, like a bank guard asleep on the job with headphones on during a robbery.," the Fed said.

Kelleher also blamed the gatekeepers who disregarded the dangers of SVB.

He said, "Key gatekeepers like compliance and risk management, internal and external auditors, lawyers, bankers, fiduciaries, and others who may have been deficient must be held accountable."



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