the Fed puts $25 billion on the table to avoid a bank run

The branch of the Silicon Valley Bank in Santa Clara (California), closed following the bankruptcy of the Californian bank, on March 10, 2023. JEFF CHIU / AP

This is not a pipe. The solution found by the American public authorities to avoid a financial panic following the bankruptcy of the Silicon Valley Bank, the SVB, is worthy of Magritte: no bailout by the taxpayer, but all the bank’s customers will have their deposits guaranteed, including including beyond the limit of 250,000 dollars (approximately 234,000 euros). Above all, the Federal Reserve (Fed), the American central bank, will set up a line of credit of 25 billion dollars to make it possible to finance the establishments which might be the subject of a banking panic. “The Fed will make additional funds available to allow banks to meet the needs of all their depositorsthe central bank explained in a press release on Sunday evening. This action will strengthen the ability of the banking system to protect deposits and ensure the continued supply of money and credit to the economy. »

Read also: Article reserved for our subscribers The closure of Silicon Valley Bank, the biggest bank failure since the crisis of 2008

It all started with the bankruptcy, Friday, March 10, of the Californian bank SVB, which specializes in venture capital. The 16th largest US bank had recklessly invested its customers’ cash in long-term US Treasury bonds. Behind this apparent good management, an irresponsible management which was unaware of the risk of rate and duration. Indeed, this policy was carried out in the midst of Covid-19, when the cost of money was zero. But when the Fed raised its rates from March 2022, the trap closed: the value of Treasury bills fell sharply, by around 15% (when rates rise, the value of a bond falls by as much as until it pays once more the equivalent of the new market rate).

At the same time, the bank’s customers withdrew their funds, either because they needed them in times of capital scarcity for tech, or because they found more profitable investments. Result, the bank, unable to meet its obligations, liquidated its portfolio of Treasury bills, cashing a loss of 1.8 billion dollars. It caused the panic of its customers, which made impossible the capital increase of 2.2 billion which was to save it, and was closed administratively Friday by the federal authorities.

Read also: Article reserved for our subscribers A bank on the brink shakes the American financial sector

The case for a rescue was tenuous

Throughout the weekend, two concerns were mounting: would this shutdown cause chain bankruptcies among start-ups deprived of their money – deposits reached $487 million for the Roku television firm. Above all, was it going to cause massive withdrawals in the small banks, customers “discovering” that their deposits were only guaranteed up to $250,000?

You have 57.89% of this article left to read. The following is for subscribers only.