FedFin First Take:  Failure Fall-out

As we noted last night, the President concurred with Treasury, the Fed, and FDIC in deciding that SVB’s Friday failure and imminent runs on Signature Bank and, most likely, others posed a systemic risk.  This determination permits the FDIC to override all the efforts to end the moral hazard feared when uninsured depositors are fully protected in bank resolutions and came with a new Fed facility making it still easier for banks to obtain liquidity from the Federal Reserve.  As we also observed, much effort is being made to assert that none of these backstops is a bailout, a conclusion sure to draw considerable discussion and dissent even from those who concur that the scale of potential run risk Monday morning could not otherwise have been averted.  With this risk hopefully now resolved, much policy and political debate will begin about the Administration’s decision; why Silicon Valley Bank was so vulnerable; whether rules or enforcement are to blame for its failure, that of Signature Bank, and systemic fragility; and – even if rules are generally robust – which revisions to them are needed.  The overall construct of reactions to this emergency and then the likelihood of substantive response beyond the Congressional statements and President’s commitment to new rules this morning will emerge in more specific form over the next few days if market strains continue to ease.  FedFin will of course continue to apprise clients of key considerations.