U.S. financial authorities on Sunday launched emergency measures to shore up deposits and confidence in the banking system after failures at Silicon Valley Bank (SVB) as well as Signature Bank in New York threatened to trigger a broader financial crisis.
After a dramatic weekend, regulators said SVB's customers will have access to all their deposits starting Monday and had set up a new facility to give banks access to emergency funds.
The U.S. Federal Reserve also made it easier for banks to borrow from it in emergencies, with a new Bank Term Funding Program aimed at safeguarding institutions affected by the market instability.
The U.S. Treasury Department identified the SVB and Signature as systemic risks and authorized the two lenders to be wound down in a way that "fully protects all depositors."
Meanwhile, the Federal Deposit Insurance Corporation (FDIC), which had placed both banks under receiverships after shutting them down, said it will reimburse all of the two banks' depositors.
Several financial institutions and companies around the world have also responded to the SVB crisis.
A Canadian banking regulator on Sunday said it was taking temporary control of SVB's unit in the country. HSBC bought the UK arm of the stricken SVB for a symbolic one pound on Monday. JPMorgan Chase & Co. and PNC Financial Services Group Inc. are in talks to buy SVB, Axios reported, citing sources.
What caused Silicon Valley Bank's failure?
The sudden shutdown of the top Silicon Valley lender SVB Financial Group can be traced to the Fed raising interest rates and souring the risk appetite of investors.
The Fed has been raising interest rates from their record-low levels since last year in its bid to fight inflation.
Investors have less appetite for risk when the money available to them becomes expensive due to the higher rates. That puts pressure on tech startups, SVB's main customers, because it makes their investors more risk-averse.
In addition, as rising interest rates shut down the IPO market for many startups and raised the cost of private financing, some SVB clients began pulling money out to meet their liquidity needs. The situation came to a head this week as SVB looked for ways to meet customer withdrawals.
What is more, to fund redemptions, SVB on Wednesday sold a $21 billion portfolio of bonds, mostly of U.S. Treasuries. The average yield on the portfolio is 1.79 percent, well below the current yield on the 10-year Treasury, which is about 3.9 percent. That forced SVB to admit a $1.8 billion loss that it needed to raise capital to cover.
Academic: Panic alone will not do much damage
Meanwhile, Michael R. Powers, a professor of finance at Tsinghua University's School of Economics and Management said there will definitely be panic.
"We'll see some panicking, I'm sure. The question is, how much?" he told CGTN, adding that he does not foresee "panic" alone to do much damage, unless there are further underlying problems.
The SVB losses are very different from 2008's "Lehman moment," however, it could turn into a systemic risk, Liu Erhfei, the founding partner of Asia Investment Capital, told CGTN in an interview. Moving forward, the Fed will be more cautious towards hiking interest rates, Liu added.
Powers expects funds to be shifted around among both big and small banks, but it will not cause runs on other banks that are otherwise healthy. He explained the financial system survived despite other bank failures before this.
(With input from Reuters)