SVB Financial (SIVB) collapsed almost 15 years to the day after global investment bank Bear Stearns failed. The Bear Stearns collapse was one of the first dominoes to fall in the 2008 financial crisis. That crisis eventually led to broad regulatory reform and oversight for banks in the U.S. and overseas. The fallout from SIVB’s demise on Friday continued to rake the banking and financial sector stocks on Monday.
California regulators on Friday shut down SVB Financial and its Silicon Valley Bank subsidiary. SIVB became the largest bank failure since Washington Mutual during the 2008 financial crisis. Last week, crypto bank Silvergate Financial (SI) also failed, and on Sunday, federal regulators closed and seized assets of Signature Bank (SBNY).
Bank stocks continued to sell off Monday. Trading was halted in First Republic Bank (FRC) after shares crashed more than 70%. Western Alliance Bancorp (WAL) dived 47%. Charles Schwab (SCHW) lost 11.6%. JPMorgan Chase (JPM), which found support on Friday, fell 1.8%, while Bank of America (BAC) retreated 5.7%. The XLF financial ETF dropped 4% and the KRE regional bank ETF sank 12.3%.
Bear Stearns 15 Years Ago
Fifteen years before SVB Financial crumbled, Bear Stearns, one of the world’s largest investment banks with around $400 billion in assets, headed toward bankruptcy. That triggered federal regulators to step in.
The Federal Reserve, then headed by Ben Bernanke, stepped up to limit financial damage. It was the Fed’s first intervention in a noncommercial bank since the Great Depression. The Fed extended Bear Stearns $25 billion in credit. And in concert with JPMorgan, it maneuvered in March, 2008, to provide Bear Stearns access to cash for 28 days.
Through the arrangement, JPMorgan (JPM) — under the leadership of new CEO Jamie Dimon —borrowed money from the Fed, then lent it to Bear Stearns. However, just hours after the 28-day cash lifeline was approved, regulators including Treasury Secretary Henry “Hank” Paulson decided Bear Stearns should be sold. The team finally brokered a deal including $30 billion in federal assistance for it to be sold to JPMorgan for $10 per share.
SVB Financial: Dodd-Frank
In July, 2010, former President Barack Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law. Obama approved the financial regulation law with the aim of stopping another financial crisis.
Eight years later, former President Donald Trump rolled back some of the bank regulations. Trump eased rules on small and medium-sized lenders, raising the threshold to $250 billion up from $50 billion under which banks are deemed too important to the financial system to fail. Institutions under this category also do not have to undergo stress tests designed to catch financial dangers.
The Supreme Court decided last month it will hear a court case challenging the constitutionality of funding for the Consumer Financial Protection Bureau (CFPB).
The CFPB, which was created by the Dodd-Frank Act on the heels of the 2008 global financial crisis, is funded by the Federal Reserve, not Congress.
SVB Financial: The Federal Response
The current federal response includes SVB Financial and Signature Bank depositors receiving access to all funds, with regulators stressing there will be no taxpayer funded bailout for the bank itself.
“No losses will be born by the taxpayers,” President Joe Biden said Monday, addressing the collapse of SVB Financial.
Biden said Monday the money will come from the fees banks pay into the Federal Deposit Insurance Corp.’s insurance deposit fund. The president said Sunday he intends to “strengthen oversight and regulation of larger banks.”
Now the FDIC controls all assets for SVB Financial and Signature Bank. The FDIC and the Federal Reserve issued a joint statement that SVB Financial depositors “will have access to all of their money starting Monday, March 13.” The same goes for Signature Bank.
The FDIC held an auction over the weekend for Silicon Valley Bank, with final bids due Sunday afternoon, according to multiple reports. The Wall Street Journal reported late Monday regulators are planning to hold another auction for SVB after they failed to find a buyer over the weekend. A timeline for the next auction is unclear, according to the Wall Street Journal.
HSBC Holdings (HSBC) will buy the U.K. arm of SVB Financial for just over $1.
First Republic Bank Receives Fed Funding
While the FDIC has taken over SVB Financial, First Republic Bank on Monday announced it received funding through the Fed and JPMorgan to shore up finances. The bank now reports $70 billion in available liquidity.
Meanwhile, the Federal Reserve on Sunday said is it creating a new financial backstop for other banks. The Fed will offer loans up to one year to banks and other institutions. They’ll have to pledge high-quality collateral such as Treasuries, agency debt and mortgage-backed securities. Up to $25 billion from the Treasury’s exchange-stabilization fund will backstop the Fed lending program.
Please follow Kit Norton on Twitter @KitNorton for more coverage.
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