Treasury/Fed/FDIC issue joint statement with Tough Love for investors in failed banks.
By Wolf Richter for WOLF STREET.
We started hearing this yesterday from “sources” cited by Bloomberg. And this morning, Secretary of the Treasury Janet Yellen got on TV and repeated the general principle, without details. Now we got it officially, in a joint announcement by Yellen, Fed Chair Jerome Powell, and FDIC Chairman Martin Gruenberg. The bailout of uninsured depositors has arrived, so now all depositors of Silicon Valley Bank and Signature Bank, which was shut down today, will be made whole, not just insured depositors. The banks that are still standing can borrow from the Fed under a new facility. But investors in failed banks are on their own.
“After receiving a recommendation from the boards of the FDIC and the Federal Reserve, and consulting with the President, Secretary Yellen approved actions enabling the FDIC to complete its resolution of Silicon Valley Bank, Santa Clara, California, in a manner that fully protects all depositors. Depositors will have access to all of their money starting Monday, March 13,” the statement said.
The Fed will pay for it at first. The Fed will print the needed funds to cover the deposits and give it to the FDIC (and the proceeds from asset sales will chip in to cover the losses). “No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer.”
Later, the FDIC will charge other banks for those losses it incurred from bailing out uninsured depositors. And maybe the Fed will eventually get is money back from the FDIC? The statement said: “Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law.”
The way it seems to work, with lots of tough love in the statement:
1. The Fed gives the money to the FDIC as needed.
2. The FDIC makes all deposits available on Monday.
3. The FDIC then sells the assets of the banks, which takes some time.
4. The difference between the cost of bailouts of the depositors and the proceeds from the asset sales is the actual amount the FDIC lost.
5. The FDIC charges other banks a “special assessment” to cover those losses, “as required by law.”
6. And it may then pay the Fed back with those funds it collected from other banks?
Signature Bank was shut down on Sunday by New York Department of Financial Services, which announced that it took possession of the bank and that it appointed the FDIC as receiver of the bank.
Depositors of Signature bank are included in the bailout, as the joint statement by Yellen, Powell, and FDIC spelled out:
“We are also announcing a similar systemic risk exception for Signature Bank, New York, New York, which was closed today by its state chartering authority. All depositors of this institution will be made whole. As with the resolution of Silicon Valley Bank, no losses will be borne by the taxpayer.”
In other words, the Fed will pay the FDIC for those losses initially, and then the FDIC will collect the funds to cover those losses via special assessment from other banks, and pay the Fed its money back? Sounds like it.
The FDIC, in its statement on Signature Bank, said that it transferred all deposits and will transfer all assets to “Signature Bridge Bank, N.A., a full-service bank that will be operated by the FDIC as it markets the institution to potential bidders.”
“Depositors and borrowers will automatically become customers of Signature Bridge Bank, N.A. and will continue to have uninterrupted customer service and access to their funds by ATM, debit cards, and writing checks in the same manner as before. Signature Bank’s official checks will continue to clear. Loan customers should continue making loan payments as usual,” the FDIC said.
Shareholders and some unsecured bondholders of both banks get bailed in. Should have done your homework, darn. The joint statement said for both banks: “Shareholders and certain unsecured debtholders will not be protected,” with Tough Love from Powell, Yellen, and Gruenberg.
Senior management gets axed. No word about claw-backs or indictments or anything, but nevertheless at least they weren’t promoted and put in charge of the bailouts. “Senior management has also been removed,” the statement said.
Other banks with a run-on-the-bank can get funding from the Fed. The Fed “will make available additional funding to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors,” the joint statement said.
In a separate statement, the Fed said that this funding for other banks “will be made available through the creation of a new Bank Term Funding Program (BTFP), offering loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions.”
They have to pledge collateral in form of “Treasuries, agency debt, MBS, and other qualifying assets.” And the collateral “will be valued at par” (instead of market value).
“The BTFP 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.”
In other words, now banks no longer have to sell those assets to cover a deposit outflow, and book a loss, but can borrow from the Fed against those assets as collateral, at par value.
“With approval of the Treasury Secretary, the Department of the Treasury will make available up to $25 billion from the Exchange Stabilization Fund as a backstop for the BTFP,” the Fed said, adding that it “does not anticipate that it will be necessary to draw on these backstop funds.”
Discount window still open. Banks may also borrow “against a wide range of collateral through the discount window, which remains open and available. In addition, the discount window will apply the same margins used for the securities eligible for the BTFP, further increasing lendable value at the window,” the Fed’s statement said.
And the expected conclusions in both the joint statement and the Fed’s statement come with the term “resilient” – meaning that individual banks can collapse, but the banking system overall will get back on its feet and brush off the dust and lick off the blood and go on.
Good to see that there’s no bailout of investors in failed banks. As far as bailouts is concerned – as revolting as bailouts are – it’s good to see that at least it’s not a bailout of investors in failed banks. They’re given some tough love instead, with stockholders and “certain debtholders,” such as preferred stock holders, likely experiencing a total loss.
In a broader sense, three banks that became symbols of the worst excesses of Free Money – two crypto-eager banks, Silvergate Bank and Signature Bank; and the startup-centered bank, Silicon Valley Bank – collapsed within a few days. All three of them are stars in my pantheon of Imploded Stocks. Sign of our times.
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