US authorities take emergency measures after Silicon Valley Bank’s failure
US authorities have taken emergency measures to restore confidence in the banking system following the failure of Silicon Valley Bank (SVB). SVB, which had become vulnerable due to unique risks, is the largest bank to fail since 2008. Regulators have established a new facility to give banks access to emergency funds and ensured that SVB’s customers will have access to all their deposits starting from Monday. Depositors of Signature Bank will also be made whole at no loss to taxpayers. However, despite the measures, concerns about broader banking risks linger, casting doubts on whether the Federal Reserve will proceed with its plan for aggressive interest rate hikes.
Depositors protected, equity and bondholders “wiped out”
Despite the collapse of SVB, depositors of both SVB and Signature Bank, including those whose funds exceed the maximum government-insured level, will be made whole. However, new policies adopted Sunday will “wipe out” equity and bondholders in SVB and Signature Bank. This move, together with the Fed’s decision to ensure financial institutions can meet the needs of all their depositors, will “restore market confidence,” according to a senior US Treasury official.
Impact of Fed’s tightening policy
The intervention of the Biden administration in the banking sector highlights how the Fed’s relentless campaign to beat back inflation is putting stress on the financial system and global markets. With the Fed poised to continue raising interest rates, investors are concerned that the financial system may not be fully out of the woods yet. Goldman Sachs analysts said they no longer expect the Fed to raise rates at its next policy meeting due to stress in the banking sector.