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U.S. mobilizes ‘material action’ to contain SVB fallout: sources

U.S. authorities were drawing up “material action” on Sunday to shore up deposits in Silicon Valley Bank (SVB) and curb any broader financial fallout from its abrupt collapse, Reuters reported based on sources familiar with the matter.

For Biden administration officials it was a busy weekend of assessing the impact of startup-focused lender SVB Financial Group’s failure on Friday, according to the sources, which added that particular focus was on the venture capital sector and regional banks, the sources said.

While details of the announcement expected on Sunday were not immediately available, one source claimed the Federal Reserve had acted to maintain the operationality of banks throughout the COVID-19 pandemic and could resort to similar action now.

This will be a material action, not just words,” one source claimed.

Earlier, U.S. Treasury Secretary Janet Yellen said that she was working with banking regulators to respond after SVB became the largest bank to fail since the 2008 financial crisis.

The official said protecting depositors was one thing that was being worked on as fear of a broader fallout across the U.S. banking sector and beyond deepened. However, she ruled out a bailout as means of fixing the situation.

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.

“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,” Yellen stressed.

So far there have been no ominous signs of panic the likes of a stampede seen in March 2020 when at the onset of the coronavirus pandemic and lockdowns the U.S. Federal Reserve announced stimulus packages and other means designed to keep credit flowing, including the lowering of borrowing costs and lengthening the terms of direct loans.

While the use of the so-called discount window facility had shot up to more than USD 50 billion in credit provided by the Fed by the end of March 2020, there were no indications of usage picking up through the middle of last week, which was shortly before Silicon Valley Bank collapsed. Fed data have shown weekly outstanding balances of USD 4 billion to USD 5 billion since the start of the year.

Although deposits of up to USD 250,000 are protected by the Federal Deposit Insurance Corporation (FDIC), concerns about deposits above the threshold had arisen, a source told Reuters, elaborating that slews of smaller-sized businesses were at risk of being unable to satisfy their employees on payday.

The wider sector is also under U.S. officials’ scrutiny as withdrawals from other regional banks balloon.

Over 3,500 CEOs and founders representing around 220,000 workers have signed a petition initiated by Y Combinator appealing directly to Yellen and others to shore up depositors, warning that more than 100,000 jobs could be in jeopardy.

What should the FDIC do? @FDICgov to guarantee all bank deposits by Sunday night before Asia open and call a time out. Run a process to recapitalize @SVB_Financial while managing liquidation of UST and MBS portfolios to be reinvested in short term UST. Determine the capital hole…

— Bill Ackman (@BillAckman) March 11, 2023

With USD 209 billion in assets, the Santa Clara, California-based lender was the 16th largest U.S. bank, making the list of potential buyers who could pull off a deal relatively short.

The FDIC, which was appointed receiver, was on the lookout for another bank up for a merger with SVB, people familiar with the matter said on Friday.

But given the scope of such a deal, regulators would likely come into play to ready special guarantees and other allowances, some industry executives felt.

Fox News Sunday Morning Futures program heard from U.S. House of Representatives Speaker Kevin McCarthy that the Biden administration and the U.S. Federal Reserve were working to come up with an announcement before markets open on Monday.

This might be just the beginning

Should no resolution be offered by Monday, other banks could bend under pressure, analysts and prominent investors warned.

According to a report by Bloomberg, the Fed, and the FDIC were mulling over the creation of a fund that would allow regulators to backstop more deposits at banks that run into trouble.

Banking executives and regulators eyed a new special vehicle in hope that such a move would restore depositors’ trust and help pre-empt any panic.

“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 went on.

Bill Ackman, a billionaire hedge fund manager, tweeted on Saturday that failure to shield all depositors could trigger the withdrawal of uninsured deposits from other institutions.

The gov’t has about 48 hours to fix a-soon-to-be-irreversible mistake. By allowing @SVB_Financial to fail without protecting all depositors, the world has woken up to what an uninsured deposit is — an unsecured illiquid claim on a failed bank. Absent @jpmorgan @citi or…

— Bill Ackman (@BillAckman) March 11, 2023

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

The S&P 500 regional banks index dropped 4.3 percent on Friday to wrap up the week down 18 percent, its worst week since 2009.

Signature Bank slumped about 23 percent, while San Francisco-based First Republic Bank fell 15 percent. Western Alliance Bancorp dropped 21 percent and PacWest Bancorp plummeted 38 percent. Charles Schwab slid more than 11 percent.

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

A preemptive capital pushup is a card that some banks could play to buttress their balance sheets or try to strike deals of their own, according to industry executives.

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

London working on minimising damage

SVB has a local subsidiary in Britain, which creates a risk that the mother bank’s collapse could also shake the market there. Chancellor of the Exchequer Jeremy Hunt said on Sunday he was collaborating with Prime Minister Rishi Sunak and the Bank of England to “avoid or minimize 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.

In a letter signed on Saturday, over 250 British tech firm executives called for government intervention, a copy seen by Reuters shows.

Advisory firm Rothschild & Co is exploring options for Silicon Valley Bank UK Limited, Reuters was told on Saturday by two people familiar with the talks. The Bank of England has said it is seeking a court order to place the UK arm into an insolvency procedure.

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