After Two US Bank Failures, Emergency Measures Announced

The recent collapse of two US banks that cater to the tech industry has caused widespread concern. The government has stepped in, announcing emergency measures to backstop the financial system, and President Joe Biden has reassured Americans that their money is safe.
Silicon Valley Bank had already suffered as technology companies faced challenges in recent months. The Federal Reserve's aggressive plan to increase interest rates to combat inflation compounded its problems. The bank held billions of dollars' worth of Treasuries and other bonds, which are safe investments. However, the value of previously issued bonds fell because they pay lower interest rates than comparable bonds issued in today's higher-interest-rate environment. This was not an issue, because banks are not required to book declining values until they are sold, and bonds are considered long-term investments. Bonds are not sold for a loss unless there is an emergency, and the bank needs cash.

Photo by Adam Nir on Unsplash

Silicon Valley, the bank that collapsed on Friday, had an emergency. Its customers were largely startups and other tech-centric companies that needed more cash over the past year, so they began withdrawing their deposits. That forced the bank to sell a chunk of its bonds at a steep loss, and the pace of those withdrawals accelerated as word spread, effectively rendering Silicon Valley Bank insolvent.
The Federal Reserve, the US Treasury Department, and the Federal Deposit Insurance Corporation have decided to guarantee all deposits at Silicon Valley Bank, as well as at New York's Signature Bank, which was seized on Sunday. They agreed to guarantee all deposits, above and beyond the limit on insured deposits of $250,000. The goal of the expanded guarantees is to avert bank runs by establishing the Fed's commitment to protecting the deposits of businesses and individuals and calming nerves after a harrowing few days.
The Federal Reserve initiated a broad emergency lending program intended to shore up confidence in the nation's financial system. Banks will be allowed to borrow money directly from the Fed in order to cover any potential rush of customer withdrawals without being forced into money-losing bond sales that would threaten their financial stability. Such fire sales are what caused Silicon Valley Bank's collapse. If all works as planned, the emergency lending program may not actually have to lend much money. Rather, it will reassure the public that the Fed will cover their deposits and that it is willing to lend big to do so.
The Fed's approach this time is relatively straightforward. It has set up a new lending facility called the “Bank Term Funding Program,” which will provide loans to banks, credit unions, and other financial institutions for up to a year. The banks are being asked to post Treasuries and other government-backed bonds as collateral. The Fed will charge a relatively low interest rate, just 0.1 percentage points higher than market rates, and it will lend against the face value of the bonds, rather than the market value. Lending against the face value of bonds is a key provision that will allow banks to borrow more money because the value of those bonds, at least on paper, has fallen as interest rates have moved higher.
In summary, the US government has taken swift action to reassure Americans that their money is safe following the recent collapse of two US banks. Emergency measures have been announced to backstop the financial system, and the Federal Reserve has initiated a new lending facility to provide loans to banks, credit unions, and other financial institutions for up to a year. By taking such measures, the government aims to avert bank runs and shore up confidence in the nation's financial system.