Federal Banking Regulators Announce Full Deposit Insurance Coverage of Silicon Valley Bank and Signature Bank Deposits; New Federal Reserve Bank Lending Program

On the evening of Sunday, March 12, 2023, the U.S. Department of the Treasury, Board of Governors of the Federal Reserve System (FRB), and the Federal Deposit Insurance Corporation (FDIC, and collectively, the Agencies) made three joint announcements relating to the stability of the banking system.

• First, the Agencies announced that all depositors of Silicon Valley Bank (SVB) will have access to the full amount of their deposits – insured and uninsured – beginning Monday, March 13. The FDIC has since announced the formation of Silicon Valley Bank, N.A., a bridge bank to which it has transferred the deposits and substantially all of the assets of SVB, through which such deposits will be made available.
• Second, the Agencies announced that the New York Department of Financial Services had closed Signature Bank (Signature), and that depositors of Signature would similarly have access to the full amount of their deposits – insured and uninsured – beginning Monday, March 13. The FDIC, as receiver for Signature, has established a bridge institution to which it has transferred the deposits and substantially all of the institution’s assets, Signature Bridge Bank, N.A., through which such deposits will be made available.
• Finally, the FRB announced that is establishing a new Bank Term Funding Program (BTFP), which will offer loans of up to one year in length to eligible depository institutions and U.S. branches or agencies of foreign banks that pledge qualifying assets as collateral. This lending program is meant to provide short- to medium-term liquidity to institutions that hold assets with long maturities, so as to mitigate the need to sell such assets at a loss in times of stress. A copy of the term sheet for the BTFP may be found here.

Under the Federal Deposit Insurance Act, supermajorities of the FRB and the Board of Directors of the FDIC, with the approval of the Secretary of the Treasury in consultation with the President, may permit the FDIC to take certain actions where it is determined that resolving an institution consistent with the statutorily required least-cost method would have serious adverse effects on economic conditions or financial stability (a Systemic Risk Determination). The least-cost method, which generally applies to resolutions, requires the FDIC to minimize the total amount of expenditures and obligations incurred in connection with the resolution of an insured bank. When a Systemic Risk Determination has been made, the FDIC is permitted to take action or provide assistance in winding up an insured bank as needed to avoid or mitigate such effects.

This authority has been invoked with respect to both SVB and Signature, and, as such, the Agencies have announced that the FDIC will make all depositors whole in both institutions, regardless of whether such depositors’ funds were insured or uninsured. Shareholders and certain unsecured creditors of SVB and Signature will not be protected, and any losses to the FDIC’s Deposit Insurance Fund resulting from this Systemic Risk Determination will be recovered through a special assessment on banks.

As mentioned above, the FRB has also announced that it is establishing the BTFP, a program which is meant to provide liquidity to certain types of institutions. The program is meant to address the mismatch between the long-dated assets that certain banks hold (such as U.S. Treasuries), and the short-term demand for withdrawals by bank customers. This mismatch can require banks to sell such assets at a loss, despite the fact that, if held to maturity, the assets would pay out fully. These sales, in turn, can have the effect of destabilizing such banks.

The BTFP will provide loans of up to one year in length, at the one-year overnight index swap rate plus 10 basis points, to U.S. depository institutions and U.S. branches and agencies of foreign banks that are eligible for primary credit through the Federal Reserve System’s overnight borrowing program. Borrowers will need to provide collateral to the Federal Reserve System, which will be valued at par. The types of collateral that are eligible for purchase by the Federal Reserve Banks in open market operations (U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets) will be eligible. Loan amounts will be limited to the value of the eligible collateral pledged by the borrower.