The US government is trying to stop a potential banking crisis

NEW YORK: On Sunday, the US government took extraordinary steps to stop a potential banking crisis in the wake of the historic collapse of Silicon Valley Bank, reassuring all savers of the bankrupt institution that they can quickly access all their money even as another major bank closes.

The announcement comes amid concerns that the factors behind the failure of a Santa Clara, California bank could spread. Regulators have been working all weekend trying to find a buyer for the bank, which has become the second-biggest bankrupt in history. Those efforts appear to have failed on Sunday.

In a sign of how fast the financial bleeding is happening, regulators announced that New York-based Signature Bank also failed and was arrested on Sunday. With over $110 billion in assets, Signature Bank is the third-biggest bank failure in US history.

A near-financial crisis that US regulators had to intervene to prevent made Asian markets nervous when trading began on Monday. Japan’s benchmark Nikkei 225 shed 1.6% in morning trading, Australia’s S&P/ASX 200 shed 0.3% and South Korea’s Kospi shed 0.4%. But the Hong Kong Hang Seng rose 1.4% and the Shanghai Composite rose 0.3%.

In an effort to bolster confidence in the banking system, the Treasury Department, the Federal Reserve and the FDIC said Sunday that all Silicon Valley Bank customers will be protected and able to access their money. They also announced measures to protect the bank’s customers and prevent additional bank runs.

“This move ensures that the US banking system continues to fulfill its vital role of protecting deposits and providing access to credit for households and businesses in a manner that promotes strong and sustainable economic growth,” the agencies said in a joint statement.

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Under the plan, Silicon Valley Bank and Signature Bank depositors, including those whose assets exceed the $250,000 insurance limit, will be able to access their money on Monday.

Also on Sunday, another beleaguered bank, First Republic Bank, announced it had bolstered its financial health by accessing funding from the Fed and JPMorgan Chase.

In a separate statement, the Fed announced an expanded emergency lending program late Sunday night that is designed to head off a wave of bank runs that could threaten the stability of the banking system and the broader economy. Fed officials have described the program as akin to what central banks have been doing for decades: lend freely to the banking system so that customers can be sure they can access their accounts at any time.

The credit line will allow banks that need to raise cash to pay savers to borrow that money from the Fed, instead of selling Treasuries and other securities to raise money. The Silicon Valley Bank was forced to dump some of its Treasury bonds at a loss to fund withdrawals from its clients. Under the new Fed program, banks can place these securities as collateral and borrow under the emergency loan.

The Treasury provided $25 billion to offset any losses incurred under the Fed’s emergency lending program. Fed officials said, however, that they do not expect any of this money to be used, given that the securities placed as collateral have a very low risk of default.

Analysts believe the Fed’s program should be enough to calm financial markets on Monday.

“Monday will certainly be a busy day for many in the regional banking sector, but today’s action dramatically reduces the risk of further contagion,” economists at investment bank Jefferies said in a research note.

While Sunday’s move was the largest government intervention in the banking system since the 2008 financial crisis, its actions are relatively limited compared to what was done 15 years ago. The two failing banks themselves were not bailed out, and taxpayers’ money was not provided to the banks.

President Joe Biden said on Sunday evening, returning aboard Air Force One back to Washington, that he would speak about the bank situation on Monday. In a statement, Biden also said he was “strongly committed to holding the full responsibility of those responsible for this mess and continuing our efforts to strengthen the oversight and regulation of the big banks so we don’t end up in this position again.”

Regulators had to rush to close the Silicon Valley Bank, a financial institution with over $200 billion in assets, on Friday as it faced a traditional bank run as depositors rushed to withdraw their funds immediately. It is the second-largest bankruptcy in US history after the bankruptcy of Washington Mutual in 2008.

Some prominent Silicon Valley executives feared that unless Washington bailed out the bankrupt bank, customers would turn to other financial institutions in the coming days. Over the past few days, stock prices of other banks serving technology companies, including First Republic Bank and PacWest Bank, have fallen.

The bank’s clients include a number of companies in the California wine industry, where many wineries rely on the Silicon Valley Bank for loans, and tech startups dedicated to combating climate change. Sunrun, which sells and leases solar energy systems, had less than $80 million in cash deposits in Silicon Valley. Stitchfix, a clothing retail website, recently revealed that it has a line of credit of up to $100 million from Silicon Valley Bank and other lenders.

Tiffany Dufoux, founder and CEO of The Cru, a New York-based career coaching platform and community for women, posted a video to LinkedIn Sunday from an airport restroom, saying the banking crisis is testing her resilience. Given that her money was tied to a Silicon Valley bank, she had to pay her employees from her personal bank account. With two teenagers going to college, she said, she was relieved to know that the government’s intention is to make savers healthy.

“Small businesses and early stage startups don’t have much access to leverage in a situation like this and we are often in a very vulnerable position, especially when we have to fight so hard to get transfers to your bank. for starters, especially for me as a black female founder,” Dufu told The Associated Press.

The Silicon Valley Bank began to slide into insolvency as its clients, mostly tech companies who were in need of cash as they struggled to get funding, began withdrawing their deposits. The bank had to sell bonds at a loss to cover the withdrawals, leading to the largest bankruptcy of a US financial institution since the height of the financial crisis.

Treasury Secretary Janet Yellen pointed to rising interest rates, which were raised by the Federal Reserve to fight inflation, as the Silicon Valley bank’s main problem. Many of his assets, such as bonds or mortgage-backed securities, have lost market value as rates have risen.

Sheila Bair, who chaired the FDIC during the financial crisis of 2008, recalled that in almost all bank failures then, “we were selling the failed bank to a healthy bank. And usually the healthy buyer also covered the uninsured, because they wanted the deductible cost of these big contributors to be so optimal that it was the best outcome.”

But in the case of the Silicon Valley bank, she said on NBC’s Meet the Press, “It was a liquidity crash, it was a bank run, so they didn’t have time to prepare for the bank’s marketing. So they have to do it. now we play catch-up.”

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