By Jeanna Smialek and Alan Rappeport

WASHINGTON – Federal regulators announced Sunday (12) that another bank had been closed and that the government would ensure that all depositors of Silicon Valley Bank (SVB) — which failed Friday (10) — would be paid back in full as Washington rushed to keep fallout from the collapse of the large institution from sweeping through the financial system.

The Federal Reserve, Treasury and Federal Deposit Insurance Corp. (FDIC) announced in a joint statement that “depositors will have access to all of their money starting Monday (13).” In an attempt to assuage concerns about who would bear the costs, the agencies said that “no losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer”.

The agencies also said that they would make whole depositors at Signature Bank, which the government disclosed was shut down Sunday by New York bank regulators. The state officials said the move came “in light of market events, monitoring market trends, and collaborating closely with other state and federal regulators” to protect consumers and the financial system.

President Joe Biden said Sunday evening that the actions were taken at his direction and that he would deliver remarks about the banking system Monday morning.

“I am pleased that they reached a prompt solution that protects American workers and small businesses, and keeps our financial system safe,” Biden said in a statement. “The solution also ensures that taxpayer dollars are not put at risk.”

He added: “I am 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.”

The collapse of Signature marks the third significant bank failure within a week. Silvergate, a California-based bank that made loans to cryptocurrency companies, announced Wednesday (8) that it would cease operations and liquidate its assets.

Amid the wreckage, the Fed also announced that it would set up an emergency lending program, with approval from the Treasury, to funnel funding to eligible banks and help ensure that they are able to “meet the needs of all their depositors.”

Concern over wide-reaching problems in the banking sector started in earnest after the FDIC took over Silicon Valley Bank on Friday, putting nearly $175 billion in customer deposits under the regulator’s control. The bank’s failure was the largest since the depths of the financial crisis in 2008. While its customers with deposits of up to $250,000 were insured by the FDIC, the bank had a large number of accounts over that limit — and there was no guarantee that those clients, which included small businesses, would receive their money in full.

That reality sent tremors through the banking industry over the weekend. Officials and economists worried that people with uninsured accounts at other regional banks might begin to fear for the safety of their own deposits — which could prompt them to pull their money out and move it to bigger banks in a hunt for safety. That, some warned, could turn what might otherwise be a one-off bank failure into a full-blown financial crisis.

For example, Signature, like Silicon Valley Bank, had a big share of large and uninsured deposits — the kind that onlookers worried about. It had experienced heavy outflows of deposits Friday, a person familiar with the matter said, though by Sunday the situation appeared to have stabilized.

Fear of contagion and the speed of the unfolding problems prompted the dramatic Sunday night announcement. The government had scrambled to try and sell Silicon Valley Bank to a private company and finding a purchaser is still a possibility. But a Treasury official said Sunday that regulators ultimately decided to move forward with the plan to make depositors whole, in part because it was proving to be challenging for a potential buyer to vet the bank’s books by Monday.

The Treasury official emphasized that the actions should not be considered to be a “bailout,” because the company’s shareholders and those who own its debt would be wiped out.

The aggressive actions to save the failed bank’s depositors from pain and to prop up the banking sector as a whole demonstrated that officials had become worried that the cracks that surfaced at Silicon Valley Bank last week — ones that tied back to a recent and rapid rise in interest rates as the Fed fights inflation — could morph into a system-wide crisis if not halted.

The FDIC is usually supposed to clean up a failed bank in the cheapest way possible, but regulators agreed that the situation posed a risk to the financial system, which allowed them to invoke an exception to that rule. The regulator will tap the Deposit Insurance Fund, which comes from fees paid by the banking industry, to make sure it can pay back depositors.

The agencies said that “any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law.”

And the Fed’s new lending program — backed by $25 billion in cash from the Treasury — could provide an even broader backstop to the banking industry.

The program will offer up to one-year loans to banks, savings associations, credit unions and other eligible depository institutions in exchange for collateral including US Treasuries, agency debt and mortgage-backed securities. In doing so, it will create a workaround to financial institutions that have seen the market value of their long-term asset holdings fall as interest rates have risen.

Many banks are sitting on big “unrealized losses” because of the shift in rates over the past year: That is partly what brought Silicon Valley Bank down. Now, they will be able to borrow against the original value of their asset holdings at the Fed. That will give them bigger cash infusions, and prevent them from having to sell in desperation.

“This is a very aggressive package, at the maximal end of what one might’ve imagined,” Krishna Guha, an economist at Evercore ISI, said Sunday.

Regulators had believed other “peer” banks were poised to face similar outflows of deposits, the Treasury official said, but hoped that the new facility will reduce the chances of runs on otherwise healthy financial institutions.

Signature Bank’s failure — newly unveiled in the Sunday announcement — occurred quickly. Executives believed they were well capitalized even if they took their realized losses, the person added, so the failure came as a surprise, according to the person familiar with the matter.

While the federal agencies painted their moves as necessary responses aimed at averting a broader meltdown, they quickly drew some backlash. Sheila Bair, the former chair of the FDIC, said the move was puzzling.

“This is a $23 trillion banking system,” she said. “It just doesn’t make sense to me why banks this size, their failures, would cause systemic ramifications.”

The government held an auction over the weekend to try to sell off Silicon Valley Bank, according to a person familiar with the matter, and a private-sector solution like that might have stoked less controversy. But several executives at potential acquirers said privately that they had been waiting to see if the government would guarantee that Silicon Valley Bank’s uninsured clients would be made whole in the end.

Besides creating the potential for criticism, the rescue was not clearly a cure-all, at least as of Sunday night.

“Rationally, this should be enough to stop any contagion from spreading and taking down more banks, which can happen in the blink of an eye in the digital age,” Paul Ashworth, chief North America economist at Capital Economics, wrote in a note to clients. “But contagion has always been more about irrational fear, so we would stress that there is no guarantee this will work.”

-New York Times