Two large banks that cater to the tech industry have collapsed after a bank run, government agencies are taking emergency measures to backstop the financial system, and President Joe Biden is reassuring Americans that the money they have in banks is safe.
It's all eerily reminiscent of the financial meltdown that began with the bursting of the housing bubble 15 years ago. Yet the initial pace this time around seems even faster.
That's usually not an issue either because bonds are considered long term investments and banks are not required to book declining values until they are sold. Such bonds are not sold for a loss unless there is an emergency and the bank needs cash. The goal of the expanded guarantees is to avert bank runs - where customers rush to remove their money - by establishing the Fed's commitment to protecting the deposits of businesses and individuals and calming nerves after a harrowing few days.
If all works as planned, the emergency lending program may not actually have to lend much money. Rather, it will reassure the public that the Fed will cover their deposits and that it is willing to lend big to do so. There is no cap on the amount that banks can borrow, other than their ability to provide collateral.Unlike its more byzantine efforts to rescue the banking system during the financial crisis of 2007-08, the Fed's approach this time is relatively straightforward.
As of the end of last year U.S. banks held Treasuries and other securities with about $620 billion of unrealized losses, according to the FDIC. That means they would take huge losses if forced to sell those securities to cover a rush of withdrawals.Ironically, a big chunk of that $620 billion in unrealized losses can be tied to the Federal Reserve's own interest-rate policies over the past year.
Going beyond the $250,000 cap required a decision that the failure of the two banks posed a “systemic risk.” The Fed's six-member board unanimously reached that conclusion. The FDIC and the Treasury Secretary went along with the decision as well.The U.S. says that guaranteeing the deposits won't require any taxpayer funds. Instead, any losses from the FDIC's insurance fund would be replenished by a levying an additional fee on banks.
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