Federal Authorities Invoke the Systemic Risk Exemption
On March 13, 2023, Secretary of the Treasury Janet Yellen invoked the systemic risk exemption after receiving recommendations from the board of the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve Board (FRB), and after consulting with the president, in order to allow the FDIC to protect all depositors of SVB and Signature Bank.
Generally, the FDIC is prohibited from protecting “depositors for more than the insured portion of deposits” that would have the effect of increasing losses to the Deposit Insurance Fund. However, the Federal Deposit Insurance Act (FDI Act) includes a “systemic risk exemption” that enables the FDIC to take any other action “as necessary to avoid or mitigate” “serious adverse effects on economic conditions or financial stability.” Pursuant to this authority, the FDIC will insure all deposits of the failed banks, which were transferred to the two bridge banks chartered by the Office of the Comptroller of the Currency.
The FRB Establishes the Bank Term Funding Program
Pursuant to its authority, under Section 13(3) of the Federal Reserve Act, the FRB, in consultation with the Secretary of the Treasury, established the Bank Term Funding Program (BTFP). The BTFP Term Sheet is available here and FAQs, as of March 15, 2023, are available here.
According to the FRB press release, the purpose of the BTFP is to provide an additional source of liquidity to eligible borrowers (e.g., banks, savings associations, or credit unitions, and certain U.S. branches or agencies of foreign banks) and eliminate an eligible borrower’s need to quickly sell certain securities in a time of stress.
The BTFP offers term loans of up to one year to eligible borrowers that pledge high-quality assets, such as U.S. Treasuries, agency debt, and certain other assets as collateral. The pledged collateral will be valued at par and margin will be 100% of par value. The interest rate will be the one-year Overnight Indexed Swap rate plus 10 basis points.
The facilities or programs established pursuant to Section 13(3) must be “broad-based” and not designed to support a single institution. In addition, all credit extended under a 13(3) facility must be “indorsed or otherwise secured” to the satisfaction of the lending Federal Reserve Bank. Under Section 13(3), a Federal Reserve Bank cannot lend to borrowers that are “insolvent” and must obtain certification from the borrower’s chief executive officer or other authorized officer that the borrower is not insolvent. Further, before lending to a borrower, the Federal Reserve Banks must obtain evidence that a borrower is “unable to secure adequate credit accommodations from other banking institutions.”
The FRB established Section 13(3) facilities and programs during both the 2008 financial crisis and the 2020 Covid pandemic response.
- During the 2008 financial crisis, the FRB created six lending facilities to support market liquidity. These facilities ranged in scope from the Term Securities Lending Facility, which provided loaned Treasury securities to primary dealers against eligible collateral, to the Term Asset-Backed Securities Loan Facility, which provided loans to investors for the purpose of purchasing asset-backed securities.
- Likewise, during the COVID-19 pandemic, the FRB used its Section 13(3) authority to create several lending facilities, including the Primary Market Corporate Credit Facility, under which the FRB purchased new bond issuances of, and provided loans to, eligible corporations, and the Commercial Paper Funding Facility, though which the FRB purchased the commercial paper of corporations.
The FRB to Review the Supervision and Regulation of Silicon Valley Bank
On March 13, 2023, the FRB announced that Vice Chair for Supervision Michael Barr is leading a review of the supervision and regulation of Silicon Valley Bank. The review will be publicly released by May 1, 2023.