The Federal Reserve moved quickly late Sunday to prevent the collapse of SVB Financial from causing any further damage to the U.S. banking system, offering lenders billions in secured loans with a backstop from the Treasury.
The Fed said it will establish a “Bank Term Funding Program” (BTFP) that will allows U.S. banks to borrow billions, at favorable market terms, if the loans are backed by Treasury bonds, high-quality agency debt or mortgage-backed securities.
Those securities will not be subject to the usual discount, or haircut, when used as loan collateral, the Fed said, allowing U.S. banks to get fast cash based on their full par value. Banks are sitting on an estimated $620 billion worth of unrealized losses from Treasury, agency and MBS bonds following the surge in market interest rates that has swamped fixed income portfolios around the world.
"The BTFP will be an additional source of liquidity against high-quality securities, eliminating an institution's need to quickly sell those securities in times of stress," the Fed said. "The Board is carefully monitoring developments in financial markets. The capital and liquidity positions of the U.S. banking system are strong and the U.S. financial system is resilient."
The move follows a joint decision by the Fed, the Treasury, the Federal Deposit Insurance Corporation (FDIC) and the White House to offer a multi-billion guarantee for the deposits held by SVB Financial, which does business as Silicon Valley Bank, following its collapse into administration on Friday.
The coordinated rescue, unveiled Sunday, will not provide support to either the bond or equity holders of SVB, all of which will be 'wiped outed' as a result of its spectacular failure.
U.S. equity futures were mixed heading into the start of the trading day on Wall Street, with futures contracts tied to the S&P 500 indicating a 5 point opening bell gain while those linked to the Dow Jones Industrial Average were looking at a 40 point decline, thanks in part to big bank stock declines. The rate-sensitive Nasdaq is looking at a firmer 75 point gain amid the pullback in Treasury yields.
Depositors New York-based Signature Bank, which was closed by New York state financial regulators Sunday, will also be protected by terms of the SVB rescue, suggesting the Fed was concerned that failure to offer support to other lenders this week would tip more of them into financial stress.
SVB, for its part, was caught in a vice between fleeing depositors and losses on its Treasury bond portfolio, which ultimately lead to a $1.8 billion gap on its balance sheet.
SVB attempted to raise around $2.25 billion in new equity in order to shore-up that hole, but the attempt ultimately failed as its deposit base continued to erode.
With the Fed now offering one-year loans on fixed income assets, banks can both assure depositors of their safety and neutralize paper losses by depositing bonds with the central bank.
In a blogpost published last month, just as Treasury yields began to climb following hotter-than-expected inflation data and the blowout January jobs report, Carl White, a senior vice president for supervision at the St. Louis Fed, warned that rising interest rates could "increase the cost of liabilities and decrease the value of investment securities held as assets."
White put the value of high-rated bond holdings -- mostly mortgage-backed securities and Treasuries -- at around 25% of bank-sector assets.
