Silicon Valley Bank: how has the US rescue differed from the UK… and is it a bailout?

The operation to rescue the stricken UK subsidiary of Silicon Valley Bank (SVB) has been hailed as resounding success on these shores, with one tech chief telling City A.M. that the takeaway-fuelled scramble over the weekend was a “fantastic example of private and public entities working together to solve an issue.”

HSBC swooped in with an eleventh hour deal and SVB UK customers were largely able to access their money once again from Monday.

But efforts to steady the Stateside banking sector and ensure US SVB customers can access their cash have taken a different tack. 

Twitter has been awash with debate over whether a move from regulators to take control of the lender and make customers whole constitutes a ‘bailout’, and whether US taxpayers will indeed be bearing the brunt of another bank collapse.

Here’s how the US operation has played out so far….

SVB’s customers could have faced billions in losses

The collapse of SVB left its depositors potentially facing billions of dollars of losses due to a $250,000 cap on deposits protected by the Federal Deposit Insurance Corp. Around 89 per cent of the bank’s of $175bn in deposits were uninsured as of the end of 2022, according to the FDIC.

However, regulators in the US moved to ensure that all customers would be made whole on Sunday evening, with all the funds exceeding the $250,000 cap falling under a new scheme announced by U.S. Treasury Secretary Janet Yellen, Fed Chair Jerome Powell and Federal Deposit Insurance Corp Chair Martin Gruenberg.

SVB’s customers had access to all their deposits from yesterday, and a new facility was rolled out to give banks access to emergency funds in the event of a crisis. The Federal Reserve also made it easier for banks to borrow from it in emergencies.

Is the action to save SVB in the US a bailout?

President Biden and US regulators have been at pains to stress that taxpayers will bear no burden for the failure of SVB and the subsequent collapse of another small lender – Signature Bank – on Sunday evening.

After a slew of bailouts in 2008 during the global financial crisis, regulators began charging banks fee that would pay into a fund set up by Federal Deposit Insurance Corporation (FDIC). President Biden said on Sunday that fund will now pay cash to the burnt depositors.

His comments came after Janet Yellen, the US treasury secretary, told CBS on Sunday: “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 that we’re not going to do that again.”

Some commentators weren’t convinced however. Andrew Ross Sorkin, the author of Too Big to Fail, claimed it was a bailout in a different form…

SVB triggers regional banking fears

The measures did little to settle fears in the global banking sector on Monday. Spooked investors fled banking stocks on both sides of the pond and smaller regional US lenders took a battering.

However, some confidence seemed to return to the market this morning as banks’ share prices rose sharply.

Shares in First Republic were up over 50 per cent after the stock plunged yesterday, PacWest Bancorp was up nearly 60 per cent and Western Alliance Bancorp traded up nearly 45 per cent. 

Among the Wall Street giants, Citi was up 6.9 per cent, Wells Fargo 4.8 per cent and Bank of America was up 1.6 per cent.

What is the outlook for the US banking sector?

The outlook for the sector remains gloomy in the US despite the slight bump in shares today, analysts warned today.

Moody’s investors service downgraded the outlook for the US banking system to negative from stable which it said reflected the “rapid deterioration in the operating environment” following the collapse of Silicon Valley Bank and Signature Bank, as well as a run on crypto-focused lender Silvergate.

“Although the Department of the Treasury, Federal Reserve and FDIC announced that all depositors of SVB and Signature Bank will be made whole, the rapid and substantial decline in bank depositor and investor confidence precipitating this action starkly highlight risks in US banks’ asset-liability management (ALM) exacerbated by rapidly rising interest rates,” Moody’s analysts warned.

They warned that “unrealised securities losses are a headwind” and “profitability will decline for many banks” over the next year.

All eyes on the Fed

SVB’s collapse was partly triggered by US bond prices tumbling over the last year or so in response to the Federal Reserve hiking interest rates nearly 500 basis points to tame scorching inflation.

The tech-focused lender had hoovered up treasuries – a form of government debt – when prices were high to beef up its balance sheet, bets which soured after prices slid. Yields and prices move inversely.

That dynamic came to the fore last week, prompting SVB to try to raise fresh equity capital, sparking fears about the bank’s health.

SVB’s failure has raised concerns about other corners of the financial system breaking if the Fed keeps raising rates, causing traders to weigh up whether chair Jerome Powell and co will pause at the next meeting on 21-22 March.

Those thinning rate expectations pushed the yield on the 2-year treasury yesterday down at the quickest pace since the 1980s.