U.S. Rushes to Avert Crisis With SVB Deposit Guarantee, Bank Fund

“While the Fed wants tighter financial conditions to restrain aggregate demand, they don’t want that to occur in a non-linear fashion that can quickly spiral out of control,” Michael Feroli, chief U.S. economist at JPMorgan Chase & Co., wrote in a note to clients. “If they indeed have used the right tool to address financial contagion risks (time will tell), then they can also use the right tool to continue to address inflation risks — higher interest rates.”

JPMorgan retained its forecast for a quarter-point rate hike by the Fed in March.

In Powell’s two days of testimony before Congress last week, SVB didn’t come up once — speaking to the suddenness of the collapse. It is the second-largest U.S. bank failure in history behind Washington Mutual in 2008.

It followed a frenetic couple of days where its long-established customer base of tech startups yanked deposits.

Responses from Treasury

Treasury Secretary Janet Yellen said the actions taken Sunday will protect “all depositors,” signaling aid to those whose accounts exceed the typical $250,000 threshold for FDIC insurance.

Fed officials said on a briefing call that their new facility will be big enough to protect uninsured deposits in the wider U.S. banking system. It was invoked under the Fed’s emergency authority allowing for the establishment of a broad-based program under “unusual and exigent circumstances,” which requires Treasury approval.

The Treasury will “make available up to $25 billion from the Exchange Stabilization Fund as a backstop” for the bank funding program but the Fed doesn’t expect to draw on the funds, it said.

Under the new program, which provides loans of up to one year, collateral will be valued at par, or 100 cents on the dollar. That means banks can get bigger loans than usual for securities that are worth less than that — such as Treasuries that have declined in value as the Fed raised interest rates.

Normally, under the Fed’s main lending program, known as the discount window, the Fed typically lends money at a discount against the assets provided as collateral, a practice known as haircuts.

The Fed said the loans under the discount window, which are up to 90 days, will now be subject to the same collateral margins as the new bank funding facility.

The Fed’s emergency lending program is “an admission not only of systemic risk but that the risks are so unusual and exigent that failure to invoke this liquidity could create a financial crisis,” said Peter Conti-Brown, associate professor at the University of Pennsylvania’s Wharton School.

–With assistance from Saleha Mohsin, Alister Bull and Tassia Sipahutar.

(Photo: Bloomberg)