March 13, 2023
👋 Good morning. Let's be honest, the biggest news for us markets folks last night was not the Oscars. So let's get right into the bank stuff.
🚨 Situational awareness: President Biden will speak today on maintaining "a resilient banking system."
Today's newsletter is 1,238 words, 5 minutes.
1 big thing: Trying to quell the crisis
The government stepped in last night to guarantee all deposits held at the failed Silicon Valley Bank — but after a brief respite the crisis flared anew today as shares of First Republic Bank cratered in premarket trading, Matt writes.
Why it matters: All SVB depositors — even the roughly 90% held in accounts above the Federal Deposit Insurance Corporation's $250,000 limit on insurance — will have access to their money this morning.
- Policymakers and those in the financial sector had hoped such efforts would prevent other regional banks from experiencing runs similar to the one SVB saw if any of those funds weren't available.
Yes, but: The initial signs this morning weren't great, as the share price of First Republic Bank, a San Francisco-based lender that serves some of the same clientele as SVB collapsed by more than 70% shortly before 7am in the pre-market trading session.
- The collapse came despite an announcement from the bank that it had shored up its finances with additional funding from the Federal Reserve and JPMorgan.
- PacWest Bancorp, another smaller California bank that investors also fell sharply Monday morning.
- Prices of short-term Treasury bills soared, as investors sought safety.
What happened: Yesterday evening, the Federal Reserve, FDIC and Treasury Department jointly announced plans to nip the burgeoning SVB banking crisis in the bud.
What they did: Because the SVB situation posed a risk to the economy and the financial system, the Fed, the FDIC and the Treasury Department recommended that they make an exception — which is allowed under the law — to the way the government resolves bank failures.
- The "systemic risk exception" allows them to use the FDIC's Deposit Insurance Fund — a pool of money funded by payments from banks — to make sure that even those with more than $250,000 at SVB don't lose any of their deposits.
- The same exception was made for Signature Bank, a New York bank that has been wobbling since SVB collapsed. It was closed Sunday by regulators — the third bank failure in a week, after Silvergate and SVB.
Separately, the Federal Reserve announced a new program aimed at making it easier and more attractive for banks to borrow against assets like Treasury bonds if they find themselves under pressure to come up with cash.
- That way banks wouldn't have to sell those bonds, many of which have declined in value as interest rates rose. That's what SVB did last week — generating a large loss that helped kick off the market panic.
Between the lines: The Biden administration is keen that yesterday evening's announcement about deposits not be seen as a "bailout," one of the more toxic concepts to the American electorate. (More on that from Felix below.)
What they're saying: "The banks, equity and bondholders are being wiped out. They took a risk as the owners of these securities, they will take the losses," said a senior Treasury Department official on a call with reporters.
- "The firms are not being bailed out. The depositors are being protected," the official said.
- SVB's senior management has also been removed.
What we're watching: News about possible buyers for SVB and Signature.
The bottom line: With shares of regional banks plunging, it seems like the government's steps weren't sufficient to snuff out the panic completely.
2. Catch up quick
3. Let the bailout debate begin
For roughly 77 hours, between noon ET on Friday and 6pm on Sunday, a chorus of Silicon Valley bigwigs and elected leaders called vocally for uninsured depositors of Silicon Valley Bank to be made whole — to be bailed out by the federal government, Axios' Felix Salmon writes.
- In the end, they got what they wanted.
Why it matters: The Biden administration is pushing back hard on the idea that this was a bailout. "No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer," says the official statement from Treasury, the Fed, and the FDIC. Many won't be convinced.
How it works: When a bank fails, depositors are made whole by the FDIC insurance fund. The insurance only covers deposits up to $250,000, although there are plenty of workarounds that allow depositors to effectively buy much more FDIC insurance than that.
- In the cases of SVB and Signature Bank, FDIC insurance will now cover all depositors, regardless of size. The FDIC insurance fund — which is funded by a levy on bank deposits — stands at roughly $125 billion.
- It's worth noting this is nothing radical or new. Uninsured depositors have been paid out in full in every bank failure in living memory, with just one exception — IndyMac, in 2008.
Between the lines: In the absence of the announcements, the insurance fund would have been pressed into heavy duty by the onset of an inevitable banking crisis.
- Conversely, in the presence of the announcement, there's no need for anybody to move their money at all, and the pressure on the fund could be tiny.
- In other words: While this is undoubtedly a bailout of depositors at SVB and Signature, its cost could, weirdly, be negative.
What they're saying: "The deposit insurance fund is bearing the risk," a senior administration official told reporters on Sunday. "This is not funds from the taxpayer."
- What they're not saying: Most taxpayers are also bank depositors, and some portion of their bank deposits is used to fund the FDIC, in what feels much like an involuntary tax being levied by a government agency.
The bottom line: If a bailout doesn't cost anything, is it really a bailout?
4. Charted: Bond cliff
It’s not just common shareholders in Silicon Valley Bank looking at possible zeroes, Axios' Kate Marino writes.
- The company has borrowed about $7 billion from investors in the form of bonds and fixed-rate preferred shares — and as Matt noted, a senior administration official said bondholders may be “wiped out.”
State of play: SVB Financial Group senior bonds lost about half their value on Friday, trading at an average price of around 48 cents on the dollar, according to MarketAxess' BondTicker.
- Friday’s sellers were lucky. When the bond market opens for trading today, prices will undoubtedly be much lower.
Go deeper: J.P. Morgan, PNC among suitors for SVB holding company
5. It was Jobs Day
With all that bank failure in the air, you didn’t think we’d forgotten that Friday was Jobs Day, did you?
- Here’s one stat from the February report worth highlighting: The number of women in the workforce in February was higher than pre-pandemic levels for the first time, Emily writes.
Why it matters: The strength of women's return to work was faster than anyone could've imagined just a few years ago when dire predictions about a "she-cession" flooded the news.
By the numbers: 105,000 of the 311,000 jobs added in February were in the leisure and hospitality sector, where women hold the majority of positions.
- Overall, women's labor force participation — that is, the percentage of women working or looking for work — is at 57.2%, almost back to the February 2020 number, 57.9%.
- Men's labor force participation rate is much higher than women's, at 68%, but still down more than a point from pre-pandemic levels.
- Read more from our Axios Macro colleagues about why Friday's report was a crowd-pleaser.
Go deeper: College-educated women did not leave labor force during pandemic
Please subscribe here! After all, in the immortal words of Jonathan Wang, Oscar-winning producer of "Everything Everywhere All At Once," accepting his award last night, "No person is more important than profits!"
Markets is edited by Kate Marino and copy edited by Mickey Meece.