US and UK bid to stem fallout from Silicon Valley Bank collapse

Governments in the UK and US have taken extraordinary steps to stop a potential banking crisis after the historic failure of Silicon Valley Bank – even as another major bank was shut down.

The UK Treasury and the Bank of England announced that they had facilitated the sale of Silicon Valley Bank UK to HSBC, Europe’s biggest bank, ensuring the security of £6.7 billion of deposits.

British officials worked throughout the weekend to find a buyer for the UK subsidiary of the California-based bank.

Its collapse is the second-largest bank failure in history.

US regulators also worked all weekend to try to find a buyer. Those efforts appeared to have failed on Sunday, but American officials assured all depositors that they could access all their money quickly.

The announcement came amid fears that the factors that caused the bank based in Santa Clara, California, to fail could spread.

In a sign of how fast the financial bleeding was occurring, regulators announced that New York-based Signature Bank had also failed and was being seized on Sunday. At more than 110 billion dollars (£91.3 billion) in assets, Signature Bank is the third-largest bank failure in US history.

The near-financial crisis left Asian markets jittery as trading began on Monday. Japan’s benchmark Nikkei 225 sank 1.6% in morning trading, Australia’s S&P/ASX 200 lost 0.3% and South Korea’s Kospi shed 0.4%. But Hong Kong’s Hang Seng rose 1.4% and the Shanghai Composite increased 0.3%.

In an effort to shore up confidence in the banking system, the US Treasury Department, Federal Reserve and FDIC said on Sunday that all Silicon Valley Bank clients would be protected and able to access their money.

They also announced steps that are intended to protect the bank’s customers and prevent additional bank runs.

The agencies said in a joint statement: “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.”

Under the plan, depositors at Silicon Valley Bank and Signature Bank, including those whose holdings exceed the 250,000 dollar (£207,000) insurance limit, will be able to access their money on Monday.

Also Sunday, another beleaguered bank, First Republic Bank, announced that it had bolstered its financial health by gaining access to funding from the US Fed and JPMorgan Chase.

In a separate announcement, the Fed announced an expansive emergency lending programme that is intended to prevent a wave of bank runs that would threaten the stability of the banking system and the economy as a whole.

US Fed officials characterised the scheme as akin to what central banks have done for decades: Lend freely to the banking system so that customers would be confident that they could access their accounts whenever needed.

The lending facility will allow banks that need to raise cash to pay depositors to borrow that money from the Fed, rather than having to sell Treasuries and other securities to raise the money.

Silicon Valley Bank had been forced to dump some of its Treasuries at at a loss to fund its customers’ withdrawals. Under the Fed’s new programme, banks can post those securities as collateral and borrow from the emergency facility.

The US Treasury has set aside 25 billion dollars (£20.8 billion) to offset any losses incurred under the Fed’s emergency lending facility. Fed officials said, however, that they do not expect to have to use any of that money, given that the securities posted as collateral have a very low risk of default.

Analysts said the Fed’s programme should be enough to calm financial markets.

“Monday will surely be a stressful day for many in the regional banking sector, but today’s action dramatically reduces the risk of further contagion,” economists at Jefferies, an investment bank, said in a research note.

Though Sunday’s steps marked the most extensive government intervention in the banking system since the 2008 financial crisis, its actions are relatively limited compared with what was done 15 years ago.

The two failed banks themselves have not been rescued, and taxpayer money has not been provided to the banks.

US President Joe Biden said on Sunday evening as he boarded Air Force One back to Washington that he would speak about the bank situation on Monday. In a statement, Mr Biden also said he was “firmly committed to holding those responsible for this mess fully accountable and to continuing our efforts to strengthen oversight and regulation of larger banks so that we are not in this position again”.

Regulators had to rush to close Silicon Valley Bank, a financial institution with more than 200 billion dollars (£166 billion) in assets, on Friday when it experienced a traditional run on the bank where depositors rushed to withdraw their funds all at once. It is the second-largest bank failure in US history, behind only the 2008 failure of Washington Mutual.

Some prominent Silicon Valley executives feared that if Washington did not rescue the failed bank, customers would make runs on other financial institutions in the coming days.

Stock prices plunged over the last few days at other banks that cater to technology companies, including First Republic Bank and PacWest Bank.

Silicon Valley Bank began its slide into insolvency when its customers – largely technology companies that needed cash as they struggled to get financing – started withdrawing their deposits.

The bank had to sell bonds at a loss to cover the withdrawals, leading to the largest failure of a US financial institution since the height of the financial crisis.

Treasury Secretary Janet Yellen pointed to rising interest rates, which have been increased by the Federal Reserve to combat inflation, as the core problem for Silicon Valley Bank. Many of its assets, such as bonds or mortgage-backed securities, lost market value as rates climbed.