Sources: US preparing to stem SVB fallout with ‘material action’

NEW YORK, March 12 — US authorities were preparing “material action” today to shore up deposits in Silicon Valley Bank and stem any broader fallout from its collapse, sources familiar with the matter told Reuters.

Biden administration officials worked through the weekend to assess the impact of startup-focused lender SVB Financial Group’s failure, with a particular eye on the venture capital sector and regional banks, the sources said.

Earlier, US Treasury Secretary Janet Yellen said she was working with regulators to respond to the implosion of SVB, which on Friday became the largest bank to fail since the 2008 financial crisis.

SVB’s sudden collapse has roiled markets and left billions of dollars belonging to companies and investors stranded but Yellen ruled out a bailout, as fears deepened of a broader fallout across the US regional banking sector and beyond.

The Federal Deposit Insurance Corporation (FDIC), which was appointed receiver, was trying to find another bank willing to merge with SVB, people familiar with the matter said on Friday.

Yellen said she was working closely with banking regulators to protect depositors.

“We want to make sure that the troubles that exist at one bank don’t create contagion to others that are sound,” Yellen told the CBS News Sunday Morning show.

“Let me be clear that during the financial crisis, there were investors and owners of systemic large banks that were bailed out… and the reforms that have been put in place means we are not going to do that again,” she said.

US House of Representatives Speaker Kevin McCarthy told Fox News’ Sunday Morning Futures program that President Joe Biden’s administration and the US Federal Reserve were working to come up with announcement before the markets open. McCarthy did not provide details but said he hoped the announcement would come later today.

Reuters was unable to determine whether a deal for the bank was forthcoming. Some industry executives said such a deal would be sizeable for any bank and would likely require regulators to give special guarantees and make other allowances for any buyer.

With US$209 billion (RM944 billion) in assets, the Santa Clara, California-based lender was the 16th largest US bank, making the list of potential buyers who could pull off a deal relatively short, they said on condition of anonymity.

The Fed and the FDIC were weighing the creation of a fund that would allow regulators to backstop more deposits at banks that run into trouble, Bloomberg reported.

Regulators discussed a new special vehicle in conversations with banking executives and hoped such a measure would reassure depositors and help contain any panic, the report said.

However, it was not clear if regulators would have political support to throw a lifeline to SVB, which catered to Silicon Valley startups and investors.

The Fed and FDIC did not immediately respond to a request for comment.

Other banks

Some analysts and prominent investors warned that without a resolution by tomorrow, other banks could come under pressure.

“The good news is it is unlikely an SVB-style bankruptcy will extend to the large banks,” risk and financial advisory firm Kroll said in a research note.

But small community banks could face issues and the risk is “much higher if uninsured depositors of SVB aren’t made whole and have to take a haircut on their deposits,” Kroll added.

SVB had an unusually high level of deposits that were not covered by the FDIC’s guarantees, which are capped at US$250,000.

Billionaire hedge fund manager Bill Ackman said in a tweet yesterday that failure to protect all depositors could lead to the withdrawal of uninsured deposits from other institutions.

“These withdrawals will drain liquidity from community, regional and other banks and begin the destruction of these important institutions,” Ackman, who said he does not have direct exposure, warned.

Kyle Bass, founder and chief investment officer of Hayman Capital Management, who also does not have exposure to SVB, told Reuters that the Fed needed to “arrange a marriage” for SVB by this evening, before markets opened in Asia.

The S&P 500 regional banks index dropped 4.3 per cent on Friday to end the week down 18 per cent, its worst week since 2009.

Signature Bank dropped about 23 per cent, while San Francisco-based First Republic Bank fell 15 per cent. Western Alliance Bancorp tumbled 21 per cent and PacWest Bancorp dropped 38 per cent after those stocks were halted several times due to volatility. Charles Schwab Corp slumped more than 11 per cent.

Signature Bank, First Republic Bank, PacWest Bank and Charles Schwab did not immediately respond to requests for comment. Western Alliance Bank declined to comment.

Some banks could look to preemptively raise capital to fortify their balance sheets or try to strike deals of their own, industry executives said.

When IndyMac and Washington Mutual collapsed in 2008, the FDIC found other firms to take on the assets and keep deposits intact. If no buyer is found for SVB, uninsured depositors will probably be left with a portion of whatever funds the FDIC can raise selling off the bank’s assets.

Global dominoes

In Britain, where SVB has a local subsidiary, finance minister Jeremy Hunt said today he was working with Prime Minister Rishi Sunak and the Bank of England to “avoid or minimise damage” resulting from the chaos.

“We will bring forward very soon plans to make sure people are able to meet their cash flow requirements to pay their staff,” Hunt told Sky News.

More than 250 UK tech firm executives signed a letter addressed to Hunt yesterday calling for government intervention, a copy seen by Reuters shows.

Advisory firm Rothschild & Co is exploring options for Silicon Valley Bank UK Limited as insolvency looms, two people familiar with the discussions told Reuters yesterday. The BoE has said it is seeking a court order to place the UK arm into an insolvency procedure. — Reuters


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