Silicon Valley Bank collapse: US government assures depositors of access to money in bid to stop financial crisis
The US government has assured depositors that they will be able to access all of their money quickly following the historic failure of Silicon Valley Bank.
Regulators had worked all weekend to try to find a buyer for the California-based bank – which has become the second-largest bank failure in history – but efforts appeared to have been unsuccessful on Sunday.
The US Treasury says all deposits in SVB are safe, though, as it sought to reassure customers of America’s 16th largest bank, as well as the financial markets.
Meanwhile, Sky News reported on Monday that the UK arm of SVB Bank is to be bought by HSBC Holdings. The sale was confirmed later on Monday morning.
The chancellor says the sale will provide security to UK customers, including tech firms the government was keen to protect from the bank’s demise.
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‘SVB rescue necessary to protect UK tech’
But despite the HSBC deal in the UK, and the US government’s moves to reassure people about SVB, the financial bleeding has continued to spread.
New York-based Signature Bank has also failed and was being seized on Sunday with more than $110bn (£90.8bn) in assets – becoming the third-largest bank failure in US history.
Asian markets were jittery as trading kicked off on Monday.
Japan’s benchmark Nikkei 225 fell 1.6% in morning trading, while Australia’s S&P/ASX 200 lost 0.3%.
South Korea’s Kospi sank 0.4% but Hong Kong’s Hang Seng rose 1.4% and the Shanghai Composite increased 0.3%.
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‘Vital roles’ protected
In a bid to instil confidence in the banking system, the Treasury Department, Federal Reserve and Federal Deposit Insurance Corporation (FDIC) said on Sunday that all Silicon Valley Bank clients in the US would be protected and be able to access their money.
US authorities also announced steps so that the bank’s customers are protected, preventing additional bank runs.
“This step will ensure that the US banking system continues to perform its vital roles of protecting deposits and providing access to credit to households and businesses in a manner that promotes strong and sustainable economic growth,” the agencies said in a joint statement.
It means that depositors at Silicon Valley Bank and Signature Bank, including those whose holdings exceed the $250,000 (£206,602) insurance limit, can access their funds today.
‘More banks will likely fail’
But some experts are warning that the move by the US authorities could spark a banking crisis by encouraging bad investor behaviour.
By guaranteeing that depositors would lose no money, authorities are raising the question of moral hazard – the removal of people’s incentive to guard against financial risk.
“This is a bailout and a major change of the way in which the US system was built and its incentives,” said Nicolas Veron, senior fellow at the Peterson Institute for International Economics in Washington.
“The cost will be passed on to everyone who uses banking services. If all bank deposits are now insured, why do you need banks?”
However, others defended the strong action.
Billionaire hedge fund manager Bill Ackman tweeted that if authorities had not intervened, “we would have had a 1930s bank run continuing first thing Monday causing enormous economic damage and hardship to millions”.
He added: “More banks will likely fail despite the intervention, but we now have a clear roadmap for how the gov’t will manage them.”
Supporters of the action to guarantee deposits say taxpayers have been protected from funding the measures, unlike the bank rescues during the 2008 financial crisis.
Elsewhere, another beleaguered bank, First Republic Bank, announced it had bolstered its financial health by gaining access to funding from the Fed and JPMorgan Chase.
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The average two-year mortgage rate has fallen below 5% for the first time since the Liz Truss mini-budget.
The interest rate charged on a typical two-year fixed mortgage deal is now 4.99%, according to financial information company Moneyfacts.
It means there are more expensive and also cheaper two-year mortgage products on the market, but the average has fallen to a near three-year low.
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Not since September 2022 has the average been at this level, before former prime minister Liz Truss announced her so-called mini-budget.
The programme of unfunded spending and tax cuts, done without the commentary of independent watchdog the Office for Budget Responsibility, led to a steep rise in the cost of government borrowing and necessitated an intervention by monetary regulator the Bank of England to prevent a collapse of pension funds.
It was also a key reason mortgage costs rose as high as they did – up to 6% for a typical two-year deal in the weeks after the mini-budget.
Why?
The mortgage borrowing rate dropped on Wednesday as the base interest rate – set by the Bank of England – was cut last week to 4%. The reduction made borrowing less expensive, as signs of a struggling economy were evident to the rate-setting central bankers and despite inflation forecast to rise further.
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Bank of England cuts interest rate
It’s that expectation of elevated price rises that has stopped mortgage rates from falling further. The Bank had raised interest rates and has kept them comparatively high as inflation is anticipated to rise faster due to poor harvests and increased employer costs, making goods more expensive.
The group behind the figures, Moneyfacts, said “While the cost of borrowing is still well above the rock-bottom rates of the years immediately preceding that fiscal event, this milestone shows lenders are competing more aggressively for business.”
In turn, mortgage providers are reluctant to offer cheaper products.
A further cut to the base interest rate is expected before the end of 2025, according to London Stock Exchange Group (LSEG) data. Traders currently bet the rate will be brought to 3.75% in December.
This expectation can influence what rates lenders offer.
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