Bank Failures Explained: Questions, Answers and How CRE Fits In

QUESTION EIGHT

Policymakers essentially did five big things within days of the SVB failure on March 10: 1. On Sunday, March 12, the Secretary of the Treasury, upon the unanimous recommendation of the boards of the Federal Reserve and the FDIC, approved systemic risk exceptions for the failures of SVB and Signature. This enabled the FDIC to guarantee all deposits of both banks (SVB and Signature). This action sent signals to the market and consumers that all depositors should have confidence in their bank and could rest assured that even if you deposit more than $250,000 in a bank, for now, those dollars were safe. The goal was to stymy the panic. 2. The Federal Reserve created the Bank Term Funding Program (BTFP) on Sunday March 12. This facility is backstopped by $25 billion from the Treasury’s Exchange Stabilization Fund. Banks can exchange select securities—namely Treasuries, Agency securities and Agency-backed MBS—at par value instead of at fair value (which include unrealized losses tied to the effects of higher interest rates) for up to one year—thereby offering liquidity to banks. (If banks use the primary credit window, collateral could include other asset types, like other non-Agency loans, but they are valued at fair value and such exchanges last only 90 days.) Succinctly, the BTFP provides banks with access to emergency funds to meet the liquidity needs of their depositors. By providing relatively short-term loans, the program aims to help provide institutions with liquidity thereby resolidifying market confidence and averting more extensive deposit outflow or “bank runs.”

3. On March 15, the Fed tweaked discount window operations in two ways: 1) narrowing the spread of the primary credit rate relative to the general overnight interest rate, and 2) allowing borrowers to get credit for as long as 90 days. The discount window is a Federal Reserve lending facility to depository institutions, the mechanism through which the Fed is the ‘lender of last resort.’ It provides ready access to funding to help banks manage their liquidity risks efficiently and provides funding during times of market stress, for example when customers and businesses start withdrawing rapidly. Unlike the BTFP though, discount window lending applies a haircut to collateral being pledged. 4. On March 16, the Treasury helped coordinate $30 billion of deposit injections from 11 big banks to First Republic (which was suffering from deposit outflows at the time). This included $5 billion of uninsured deposits from JP Morgan, Bank of America, Wells Fargo and Citigroup as well as $2.5 billion from Goldman Sachs and Morgan Stanley. An additional five banks each deposited $1 billion. All of these were uninsured and intended to signal confidence in the other large regional banks and hence calm some of the panic. 5. On March 16, in its release of Federal Reserve’s report on factors affecting reserve balances (the so-called H.4 release), it disclosed lending of $143 billion to bridge banks set up by the FDIC (footnote 7 under Table 1), presumably to resolve SVB and Signature. These Fed loans were backed by FDIC collateral and repayment guarantees. Since then, the balance of these loans has increased to $173 billion.

What has the government response been so far to the banking turmoil?

ANSWER

Massive response, and fast.

Bank Failures Explained - Questions, Answers and How CRE Fits In

12