Feds Give Access to All SVB Deposits Today

Winery operators and winegrape growers were among those who breathed a sign of relief when Federal officials announced Sunday evening that all depositors of the former Silicon Valley Bank will have access to 100% of the money they have on deposit at the bank.

That means the wineries who banked at SVB can pay their employees.  They can pay their bills.  They can process their credit cards without worry. Acquisitions and winery and vineyard development can proceed.  

It was the right move.  Silicon Valley Bank was not insolvent.  It had more than enough assets to cover all its liabilities.  What it didn't have was cash because some depositors, spooked by the relentless increases in interest rates driven by the Federal Reserve, staged a run on the bank, demanding their money back.  

To meet that demand, SVB had to sell virtually its entire portfolio of Government obligations.

The problem was, a lot of those government obligations were long-term that paid a higher return.  After the 2008 crisis, regulators had proclaimed these Treasury bonds and mortgage-back securities nearly risk free.  The problem is, they're not – when interest rates go up, bond prices go down.  So SVB had to sell those bonds for a fraction of their face value.  When it ran out of bonds to sell, SVB was out of cash.  

The same thing could have happened at any bank in the country, including the "Big Four" – JPMorgan Chase, Citibank, Bank of America and Wells Fargo.  To avoid runs from spreading like Covid-19, the Feds came up with a plan to guarantee all deposits at SVB, and in the process effectively guarantee all deposits in all U.S. banks.

They announced that taxpayers will suffer no losses as a result of the government's intervention.  That's a guarantee; as the remaining longer-term bonds mature, the government will simply collect the cash.  Plus, the Feds plans a special assessment on banks to make up for any losses the government may suffer.

To prevent other banks from having the same fate as SVB, the Federal Reserve will make additional funding available to banks through a new "Bank Term Funding Program" to banks that pledge Government obligations.  Whereas SVB had to sell its Governments at market prices, the new government program will value the government bonds not at market value but at face value.

Washington officials have already begun working overtime to shift attention away from their critical role in causing this crisis.  President Biden declared that those behind the SVB "mess" will be held accountable and took credit for making deposits completely available.  You can bet he wasn't talking about holding Jerome Powell accountable.

In a related development, New York State bank regulators closed Signature Bank, which had specialized in lending to cryptocurrency companies.