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The US banking system has been gripped in recent days by a series of convulsions that has seen three banks collapse and authorities have taken extraordinary steps to reassure depositors.
It all started on Wednesday night with a liquidation announcement from small regional bank Silvergate, a favorite of the cryptocurrency crowd.
The California-based company was swept away by several crypto incidents, including the implosion of the FTX exchange, before facing a wave of sudden withdrawals.
Later that night, mid-market institution Silicon Valley Bank announced that it was facing a huge round of unexpected withdrawals.
SVB, a leading lender to startups across the United States since the 1980s and the nation’s 16th-largest bank by assets, has been hit by the slowdown in the tech sector as cash-hungry companies rush to get their hands on their money.
SVB – along with other banks – was also dealing with the effects of the Federal Reserve policy reversal, as the US central bank acted aggressively over the past year to counter inflation by raising interest rates. interest.
Banks typically borrow money with short-term instruments while lending using long-term vehicles.
Ordinarily, this dynamic is beneficial because interest rates on long-term instruments are higher than those on short-term bonds.
But due to the volatility triggered by the Fed’s policy pivot, there was an “inversion” in the bond yield curve.
The extent of SVB’s problems emerged during a presentation last Wednesday.
While the bank highlighted the strength of its balance sheet and the relatively low proportion of its loans in relation to its deposits, it also announced a capital increase of 2.25 billion dollars and revealed that after an emergency sale of a portfolio of financial securities worth 21 billion dollars, it resulted in a loss of 1.8 billion dollars.
The announcement spooked investors and customers and sparked a run on deposits.
On Thursday alone, SVB saw around $42 billion in withdrawal orders.
It was unable to honor all of these requests and posted a negative cash position of nearly $1 billion at the end of the day.
On the stock market, SVB fell by 60%.
Trading was halted on Friday before the Federal Deposit Insurance Corporation (FDIC) took over the bank and said it would protect insured deposits, up to $250,000 per customer.
But the FDIC guarantee only covered about 4% of the bank’s deposits, with most accounts well over that limit and customers unsure whether they would be able to get their money back in full.
The largest U.S. banks are considered stable, in part because of stringent requirements enacted after the 2008 financial crisis.
But other medium-sized and regional institutions have been pressured by fears of a run on deposits similar to that suffered by the SVB.
Shares of New York Signature Bank, California PacWest and Arizona-based Western Alliance all fell 20% that day.
With the future of SVB and billions in deposits hanging in the balance, Fed, FDIC and Treasury officials raced to find a solution, hoping to avert a potential financial panic before the opening of trading. financial markets in Asia.
To prevent a bank failure from spreading into a systemic banking crisis, the three federal agencies announced on Sunday that SVB depositors would have access to “all their money” beginning Monday, March 13, and that U.S. taxpayers won’t have to pay the bill. .
The same statement revealed that Signature Bank, the 21st in the country, was automatically closed on Sunday and that its customers would benefit from the same measures as those of Silicon Valley Bank.
In a potentially major development, the Fed announced that it would make additional funds available to banks to help them meet depositor needs, which would include withdrawals.
On Monday, President Joe Biden hailed “immediate action” from regulators while trying to reassure.
“The bottom line is this: Americans can rest assured that our banking system is safe. Your deposits are safe,” Biden said.
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