Silicon Valley bank depositors are protected by the US government

The banking regulator on Sunday developed a plan to support depositors with money Silicon Valley Banka crucial step in stemming a feared systemic panic triggered by the collapse of a tech-centric institution.

Depositors in both failed SVB and signature bank in New York, which shut down on Sunday amid similar systemic contagion fears, will have full access to their deposits as part of several moves officials approved over the weekend. Signature has been a popular funding source for cryptocurrency companies.

Anyone who has money at the bank will have full access from Monday.

The Treasury labeled both SVB and Signature as systemic risks and gave it the power to resolve both institutions in a way that “fully protects all depositors”. The FDIC’s deposit insurance fund is used to cover depositors, many of whom were uninsured under the $250,000 deposit guarantee.

Along with this move, the Federal Reserve also said it is establishing a new Bank Term Funding Program aimed at protecting institutions hit by the market instability of the SVB default.

A joint statement from the various regulators involved said there were no bailouts and no taxpayer costs associated with any of the new plans. Shareholders and some unsecured creditors are not protected and lose all of their investments.

“Today we are taking decisive action to protect the U.S. economy by enhancing public confidence in our banking system,” said Fed Chair Jerome Powell, Treasury Secretary Janet Yellen and FDIC Chair Martin Gruenberg in a joint statement.

The Fed facility will offer loans for up to one year to banks, thrifts, credit unions and other institutions. Those who draw down the facility are asked to post high-quality collateral such as government bonds, government bonds and mortgage-backed securities.

“This action will strengthen the banking system’s ability to protect deposits and ensure the continued supply of money and credit to the economy,” the Fed said in a statement. “The Federal Reserve is prepared to address any liquidity pressures that may arise.”

The Treasury Department provides up to $25 billion from its FX Stabilization Fund as a back-up against potential losses from the financing program. A senior Fed official said the Treasury program is unlikely to be needed and will serve as protection.

The same official expressed confidence that the various moves would boost confidence in the financial system and provide funding guarantees and liquidity, which are considered essential in financial crises.

Along with the facility, the Fed said it would ease conditions in its discount window, which will use the same conditions as the BTFP. However, the new facility offers more favorable terms with a longer loan term of one year versus 90 days. Also, securities are valued at face value rather than market value, which is determined in the discount window.

The haircut, or reduction in principal, is critical because it is estimated that institutions’ unrealized losses on held-to-maturity Treasury bills and mortgage-backed securities may be approximately $600 billion.

“This should be enough to prevent contagion from spreading and shutting down more banks, which can happen in the blink of an eye in the digital age,” said Paul Ashworth, chief economist for North America at Capital Economics, in a note to clients. “But contagion has increasingly been about irrational fear, so we want to stress that there’s no guarantee this will work.”

Markets reacted positively to the developments, with futures linked to the Dow Jones Industrial Average rising more than 250 points in early trade. Cryptocurrency prices also rallied strongly, with Bitcoin gaining more than 7%.

The news came after Yellen said on Sunday morning there would be no bailout for SVB.

“We won’t do that again. But we’re concerned about depositors and we’re focused on meeting their needs,” Yellen said on CBS’s Face the Nation.

The collapse of the SVB was the largest financial institution collapse in the country since Washington Mutual’s bankruptcy in 2008.

The dramatic moves come just days after SVB, a key funding hub for tech companies, reported it was struggling, sparking a run on the bank’s deposits.

Authorities had spent the weekend looking for a larger body to buy the SVB but had come up short. PNC was an interested buyer but pulled out, a source told CNBC’s Sara Eisen.

A senior Treasury Department official said Sunday night that a sale of Silicon Valley Bank was still a possibility. Sunday’s initiatives were taken to avert further potential problems.

The scenario dates back to the September 15, 2008 collapse of investment banking giant Lehman Brothers, which was also insolvent and looking for a buyer. In this case too, after a weekend of disputes, the government was unsuccessful, triggering the worst of the crisis.