The US Federal Reserve has announced that all deposits at Silicon Valley Bank (SVB) of California and Signature Bank of New York will be guaranteed by the FDIC.
While this is great news for those having funds in the failed institutions, the implications for the future of the US banking sector are enormous.
Depositors were already guaranteed on deposits up to $250K, however there were many "start up" businesses and large corporations who had significantly larger sums in SVB inparticular.
CNBC reported that SVB had $175.4 billion in total deposits as of December, however the FDIC has yet to determine how many of those deposits are uninsured.
Despite the lack of detail, the following is the announcement about this new plan that was just posted on the official website of the Federal Reserve on Sunday...
To support American businesses and households, the Federal Reserve Board on Sunday announced it will make available additional funding to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors. This action will bolster the capacity of the banking system to safeguard deposits and ensure the ongoing provision of money and credit to the economy.
The Federal Reserve is prepared to address any liquidity pressures that may arise.
The additional funding 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 pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. These assets will be valued at par. 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.
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 Federal Reserve does not anticipate that it will be necessary to draw on these backstop funds.
After receiving a recommendation from the boards of the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve, Treasury Secretary Yellen, after consultation with the President, approved actions to enable the FDIC to complete its resolutions of Silicon Valley Bank and Signature Bank in a manner that fully protects all depositors, both insured and uninsured. These actions will reduce stress across the financial system, support financial stability and minimize any impact on businesses, households, taxpayers, and the broader economy.
The Board is carefully monitoring developments in financial markets. The capital and liquidity positions of the U.S. banking system are strong and the U.S. financial system is resilient.
Depository institutions may obtain liquidity 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 Board is closely monitoring conditions across the financial system and is prepared to use its full range of tools to support households and businesses, and will take additional steps as appropriate.
A few of the largest depositors include Circle with $3.3 billion, Roku $487 million, BlockFi $227 million, Roblox $150 million, Ginkgo Bio $74 million, iRhythm $55 million, Rocket Lab $38 million, Sangamo Therapeutics $34 million, Lending Club $21 million and Payoneer and $20 million, in deposits.
By implementing a guarantee on all deposits at these two banks the Federal Reserve has essentially removed the $250K limit on insured funds in an attempt to prevent a complete meltdown in the banking sector.
Whether or not the plan works as intended, the result will be higher inflation as the Fed prints more money to cover the bank losses. That, in turn, will have an impact on all Americans and anyone doing business in US denominated funds worldwide.
What remains to be clarified is whether this means all banks will be covered for any losses, should they fail or whether this was a one time giveaway for an important high risk Venture Capital lender.
