SI - FDIC chair to explain decision for extending insurance at SVB Signature Bank

2023-03-28 09:57:14 ET

In the run-up to Silicon Valley Bank and Signature Bank collapsing, "the troubles experienced by Silvergate Bank demonstrated how traditional banking risks, such as lack of diversification, aggressive growth, maturity mismatches in a rising interest rate environment, and sensitivity to liquidity risk, when not managed adequately, could combine to lead to a bad outcome," Federal Deposit Insurance Corp. Chairman Martin Gruenberg is prepared to say to a Senate committee on Tuesday.

On March 8, Silvergate Bank, part of Silvergate Capital ( SI ) announced it would self-liquidate as it experienced a severe drop in deposits after crytpocurrency exchange FTX's bankruptcy. The loss of deposits caused Silvergate Bank to sell debt securities to cover deposit withdrawals, which resulted in a net earnings loss of $1B.

The FDIC board voted unanimously on March 12 to recommend that the Secretary of the Treasury make a systemic risk determination that would allow the FDIC to extend to deposit insurance protection to all of SVB and Signature Bank's depositors, including those deposits over the $250K cap, when winding down those banks, Gruenberg said in prepared remarks .

He cited concerns of "negative knock-on consequences for depositors and the financial system more broadly," if ininsured depositors didn't receive immediate assistance. "There were also concerns that investors could begin to doubt the financial strength of similarly situated institutions making it difficult and more expensive for these banks to obtain needed capital and wholesale funding," according to his remarks.

Treasury Secretary Janet Yellen also determined the that least-cost provisions to the Federal Deposit Insurance Act would have serious effects on economic conditions and financial stability, he will say.

He will point out the the action does not protect shareholders or unsecured debt holders of the two failed banks and that the board and most senior executives at the banks were removed.

The FDIC estimated the cost to the Deposit Insurance Fund of resolving SVB to be $20B and for Signature Bank at $2.5B. The losse will be recovered from special assessments on insured institutions, their holding companies, or both.

Still, he emphasized "the state of the U.S. financial system remains sound despite recent events.

Senate Committee on Banking, Housing, and Urban Affairs hearing starts at 10:00 AM ET.

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