On Sunday evening, the Department of the Treasury (Treasury), Federal Reserve, and the Federal Deposit Insurance Corporation (FDIC) announced measures to (1) prevent losses to all depositors—including all uninsured depositors—after Silicon Valley Bank (SVB) and Signature Bank failed and entered into FDIC receivership and (2) to provide liquidity support to banks.
Together, as made clear in the Joint Statement issued by the agencies, the agencies are emphatic that the “actions demonstrate [their] commitment to take the necessary steps to ensure that depositors’ savings remain safe.” Viewed in tandem, this is an extraordinary combination of government support.
The White House emphasized “confidence that … bank deposits will be there when need[ed]” in its statement over the weekend and in live remarks from President Biden on March 13, 2023. In addition, the President’s remarks echoed the message contained in the White House statement that the government is “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.” In live remarks, the President communicated the Administration’s position that it will do whatever it takes.
Protection of Depositors
To prevent potential losses to depositors at SVB and Signature Bank, the agencies invoked the so-called “systemic risk exception.” The exception allows the Deposit Insurance Fund (DIF) to protect “depositors for more than the insured portion of deposit” if doing so would “avoid or mitigate” the “serious adverse effects on economic conditions or financial stability” that would otherwise occur from winding up a bank in receivership. 12 U.S.C. § 1823(c)(4)(G). The exception requires a two-third vote by the Boards of the Federal Reserve and FDIC and an emergency determination by the Secretary of the Treasury made in consultation with the President. The agencies noted that losses to the DIF will be recovered by a special assessment on banks as required by the systemic risk exception authority.
Liquidity Support
The Federal Reserve, with the support from Treasury of up to $25 billion from the Exchange Stabilization Fund,1 announced the Bank Term Funding Program (BTFP) to support bank liquidity by lending against eligible collateral. Notably:
- Any U.S. federally insured depository institution (including a bank, savings association, or credit union) or U.S. branch or agency of a foreign bank that is eligible for primary credit is eligible to borrow under the BTFP;
- The eligible collateral includes collateral eligible for purchase by the Federal Reserve Banks in open market operations that was owned by the borrower as of March 12, 2023;
- Advances will be up to the value of pledged collateral and the valuation of pledged collateral will be at par; and
- Advances will be made available for a term of up to one year;
The BTFP is expected to operate until “at least” March 11, 2024.
The BTFP appears to respond to concerns regarding maturity mismatch at SVB and potentially other banks, by enabling them to obtain funding to meet liquidity needs, collateralized by high quality securities owned by the bank. The Federal Reserve stated in the announcement of the BTFP that it “will be an additional source of liquidity against high-quality securities, eliminating an institution's need to quickly sell those securities in times of stress.”
As a package, the measures are directed at calming concerns about depositor losses from the failures of SVB and Signature Bank and mitigating potential liquidity concerns at open banks. As relayed in the Joint Statement, the actions are directed at “strengthening public confidence in our banking system.” The overarching theme of the agencies and from the White House is that the government will do whatever it takes to keep the banking system safe and sound.
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