FDIC Implements Measures to Stabilize Banking System in Response to Recent Bank Failures and Deposit Outflows (Eng Only)

FDIC Implements Measures to Stabilize Banking System in Response to Recent Bank Failures and Deposit Outflows

Over the past weekend, Silicon Valley Bank and Signature Bank are being taken into receivership by the Federal Deposit Insurance Corporation (FDIC). The treasury, Federal Reserve and FDIC issued a joint statement which made two major policy announcements intended to stabilise the banking system in response to recent bank failures and the risk of continued deposit outflows.

The first measure is the use of the 'systemic risk exception' by the FDIC to protect uninsured depositors in two bank resolutions. This option is available to the FDIC if resolving a bank in the least costly method would have "serious adverse effects on economic conditions or financial stability". The FDIC's decision to make this designation should reduce the perceived risk of holding uninsured deposits in other institutions and is likely to be helpful in reducing deposit outflows.

The second measure is the Bank Term Funding Program (BTFP), which allows any federally insured bank that is eligible for discount window access to receive advances of up to one year in return for eligible collateral (generally Treasuries and agency securities). The facility values collateral at par without the standard haircut applied in other programs, allowing banks to fund potential deposit outflows without incurring losses on depreciated securities. The facility is backstopped with $25bn from the Treasury's Exchange Stabilisation Fund (ESF), and the Fed does not anticipate the need to draw on these backstop funds.

The second measure is the Bank Term Funding Program (BTFP), which allows any federally insured bank that is eligible for discount window access to receive advances of up to one year in return for eligible collateral (generally Treasuries and agency securities). The facility values collateral at par without the standard haircut applied in other programs, allowing banks to fund potential deposit outflows without incurring losses on depreciated securities. The facility is backstopped with $25bn from the Treasury's Exchange Stabilisation Fund (ESF), and the Fed does not anticipate the need to draw on these backstop funds.

Although the market initially expected a half-point increase in interest rates by the Fed this month, the current crisis and underwhelming growth in US employee hourly earnings have lowered the expectations to a quarter-point increase. That could lower the strength of US Dollars and could leave some room for interest rate sensitive assets.