The Fed: Fed announces new emergency loan program for banks to ease contagion risk from Silicon Valley Bank

by | Mar 12, 2023 | Stock Market

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
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 fo …

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