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ComplianceMarch 22, 2023

Banks, regulators react to avoid greater banking sector collapse

As published in the Dodd Frank Update

Following the collapse of three U.S. regional banks earlier this month – Silvergate, Silicon Valley (SVB), and Signature – banks and regulators in the United States and the United Kingdom took a series of emergency measures to prevent a ripple effect that could be catastrophic for the banking sector and the global and U.S. economies.

First Republic Bank, which saw its stock price drop by nearly 90 percent in less than two weeks, was seen by industry experts and regulators as being one of the next banks to fold if no intervention was done. To prevent the collapse of another bank, 11 national banks, allegedly led by JPMorgan Chase CEO Jamie Dimon, issued $30 billion in deposits to First Republic to provide it with liquidity sufficient to cover its deposit obligations.

The attempted rescue seems to have done little to calm investors, as First Republic’s stock value has continued to plummet. Credit ratings company S&P stated, in downgrading First Republic, that the $30 billion infusion may not solve the substantial challenges the bank is likely facing, even if near-term pressures on liquidity are eased.

New York Community Bank (NYCB) was upgraded and saw a marked increase in its stock value after the Federal Deposit Insurance Corp. (FDIC) announced that NYCB subsidiary Flagstar Bank entered into an agreement to take over Signature’s deposits and most of its loans.

The FDIC announced it is still seeking banks to take over the deposits and loans of SVB, whose collapse seemed to be the triggering event for the industry-wide instability. To increase interest, the bank regulator is seeking separate bids for SVB and its subsidiary, Silicon Valley Private Bank.

House Financial Services Committee Chair Patrick McHenry (R-N.C.) and Ranking Member Maxine Waters (D-Calif.) announced the committee will hold hearings to investigate the cause of the collapse of SVB and Signature.

“The House Financial Services Committee is committed to getting to the bottom of the failures of Silicon Valley Bank and Signature Bank,” McHenry and Waters said. “This hearing will allow us to begin to understand why and how these banks failed. As Chairman and Ranking Member, we take our oversight duties seriously. We are working around the clock to deliver answers to the American people in order to protect depositors, promote the safety and soundness of America’s banks, and strengthen our financial system. We will conduct this hearing without fear or favor to get the answers the American people deserve.”

While banks and regulators appear to be working in coordination to prevent a greater banking sector collapse than has already occurred, the triggers of these events are still unclear.

“Identifying the root causes leading to the collapse of Silicon Valley Bank and Signature Bank is still very much a work in progress. Significant, meaningful efforts are underway in the federal government to comprehensively investigate and review these failures and help avert additional problems,” Timothy Burniston, senior advisor, regulatory strategy for Wolters Kluwer Compliance Solutions, said. “However, what we can point to in the early days of these developments is that regulators and major banks are collectively working to stem further losses and instill confidence.”

The Federal Reserve, along with other central banks - the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank – announced additional efforts to maintain the stability and liquidity of the U.S. dollar in standing swap line agreements amongst the central banks.

To improve the swap lines’ effectiveness in providing U.S. dollar funding, the central banks currently offering U.S. dollar operations have increased the frequency of 7-day maturity operations from weekly to daily. These daily operations commenced on March 20 and will continue at least through the end of April.

The network of swap lines among these central banks is a set of available standing facilities and serve as an important liquidity backstop to ease strains in global funding markets. It helps to mitigate the effects of such strains on the supply of credit to households and businesses.

Internationally, the collapse of SVB led to a week of uncertainty and instability throughout British banking markets. Like in the U.S., SVB’s British arm (SVB UK) served as an integral financial institution for tech startups throughout the U.K. It held approximately $6.7 billion in loans and over $8 billion in deposits as of March 10.

Its sudden collapse put the British tech industry into a realm of uncertainty as thousands of British tech firms, which held money with SVB UK, were left without clear answers as to the security of their deposits. To avoid greater ramifications within the British tech industry, UK-based bank HSBC purchased the British arm of SVB for £1 (US$1.21).

In a statement, HSBC CEO Noel Quinn said the acquisition meant that “SVB UK customers can continue to bank as usual, safe in the knowledge that their deposits are backed by the strength, safety and security of HSBC.”

Had a buyer not been found, SVB UK would have been placed into insolvency by the Bank of England, leaving customers with only deposits worth up to $100,000 guaranteed.

In a statement, the central bank said it “can confirm that all depositors’ money with SVB UK is safe and secure as a result of this transaction.”

“We saw further mitigation efforts by the Federal Reserve and five central banks across the globe with the announcement of a coordinated expansion in the frequency of dollar swap line arrangements to help boost liquidity as part of a growing response to banking industry turmoil,” Burniston noted. “And we expect more positive measures by regulators and the industry to address and calm the current turbulence in the industry in the days to come.”

This article features insights from:

Timothy Burniston
Senior Advisor, Regulatory Strategy

Timothy R. Burniston joined Wolters Kluwer in December 2011 to lead the company’s Risk and Compliance consulting practice. Under his leadership, the practice grew significantly in scope and now enjoys a national reputation for excellence.

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