Fed announces new emergency loan program for banks to ease SVB contagion risk


The Federal Reserve on Sunday announced a new emergency loan program to bolster the capacity of the banking system in the wake of the collapse of Silicon Valley Bank.

The program will help assure banks have the ability to meet the needs of all their depositors.

The collapse of Silicon Valley Bank SIVB, -60.41%, the second largest in American history, came as its depositors became concerned over the value of the bank’s bond portfolio. Many banks have a similar profile, holding bonds that have lost value as the Fed has sharply raised interest rates. It was called an “old-fashioned bank run” by former FDIC chair Sheila Bair.

U.S. financial regulators also announced all depositors at Silicon Valley Bank will get their money back.

The program appears aimed at stopping similar runs at other banks.

Also see: Silicon Valley Bank depositors will get ‘all of their money,’ regulators say

“We think the double-barreled bazooka should be enough to quel potential runs at other regional banks and restore stability in the days ahead,” said Krishna Guha, a former top Fed staffer and now Vice Chairman of Evercore ISI, adding that this was “max force response” from the government.

Under the new program, banks and other lenders will be able to pledge Treasurys and mortgage-backed securities for cash. Banks can pledge collateral at par, or face value, rather than marking the assets to their current market value.

This will eliminate the need for a bank to quickly sell its assets in times of stress.

The central bank said “it is prepared to address any liquidity pressures that may arise.”

The program is called the Bank Term Funding Program. Treasury Secretary Janet Yellen approved a plan to provide up to $25 billion as a backstop for the new program.

The Fed said it is “carefully monitoring developments in financial markets.”

The central bank said that the capital and liquidity positions of the U.S. banking system “are strong” and the U.S. financial system is “resilient.”

The Fed said its board of governors “is closely monitoring conditions across the financial system and is prepared to use its full range of tools to support households and businesses, and will take additional steps as appropriate.”

The Fed noted that its emergency-lending “discount window” is open and available for banks.

The discount window will accept collateral on the same terms used for the BTFP.

Terry Haines, founder of Pangaea Policy, said the program is at once generous to banks but limited in terms of time.

The program attempts “to satisfy both those who want blanket action and those urging against overreaction,” Haines said, in a note to clients.

“Tonight’s action also provides a buffer that makes more likely that the Fed’s interest-rate committee continues to hike,” he added.

This article was originally published by Marketwatch.com. Read the original article here.

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