Recent collapses of Silicon Valley Bank, Signature Bank of New York, and the subsequent fallout of First Republic bank erode customer and investor confidence raising the question of whether these troubles foreshadow a bigger liquidity crisis.
On March 12, following the collapses of the two banks, Federal Reserve Board announced it would “make available additional funding to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors.”
In the past week, cash-short banks borrowed about $300bn from the Federal Reserve after the central bank made loans and other financial assistance available to banks. Nearly half the money – $143bn – went to holding companies for the two embattled banks – Silicon Valley and Signature Bank, spawning widespread alarm in financial markets. The Fed did not identify the banks that received the other half of the funding or say how many of them did so. On the same note, Wall Street's biggest banks organized a $30-billion lifeline to bail out another failing tech-focused, San Francisco-based First Republic bank.
The figures provide an insight into the scale of the Fed's assistance to the financial sector after the two banks collapsed. In the hectic week ending March 15, banks borrowed $152.85 billion through the discount window, up from $4.58 billion the week before. The discount window means lending less cash than the collateral is worth, which adds an extra safety buffer for the Fed, in case the borrower does not pay back the loan.
Examples of when the use of the discount window escalated before include after the Sept. 11 attacks, during the financial crisis and recession of 2007-2009, as the pandemic hit in 2020, and now in the days following the collapse of Silicon Valley Bank (SVB) and Signature Bank. According to Bloomberg, the previous record of borrowing through the discount window was $111 billion during the 2008 financial crisis.
Experts attribute Silicon Valley Bank’s failure to a mismatch between its assets and liabilities, a situation that may not be contained to just a small circle of banks. Deposit growth has exceeded bank lending over the past few years, while banks placed more capital in the perceived safety of medium and long-duration Treasuries. However, these securities have lost some of their market value due to inflation and the Fed’s aggressive and rapid raising of interest rates. Some banks have been forced to cash the Treasuries in before maturity at a loss to meet a heavy spate of deposit withdrawals.
Colorado-based portfolio manager Brian Mulberry of Zacks Investment Management, which manages $15 billion in assets, said to MarketWatch that “the common thread facing most, if not all, U.S. banks centers on the way they may have managed interest-rate risks — leaving them in trouble should a large-scale run develop.”
Cornelius Hurley, adjunct professor at the Boston School of Law told Boston University Today he believes the cause of the problem is related to negligence on the regulators’ part. Hurley explained that Silicon Valley had $20 billion in advances from the Federal Home Loan Bank of San Francisco at the time it failed. “That’s crazy high. It also was the largest borrower six months ago. That was a canary in the coal mine. What the regulators should have done is look at that level of borrowing back last summer, go into the bank, slap a cease and desist order on them, fire many of the executives, and say, look, you have 90 days to raise capital. If you can’t, find a merger partner”, said Hurley.
Former U.S. Treasury Secretary Lawrence H.Summers told the Harvard Gazette: “So, there are many different elements of causation. But certainly, this is an important supervisory and regulatory failure.“