Fed to hold meeting on Monday in wake of SVB's swift collapse, seeks to avoid widespread panic

(Updated - March 12, 2023 11:51 AM EDT)

The Federal Reserve Board of Governors, which includes Fed Chairman Jay Powell, will be holding a regularly scheduled closed-door meeting under expedited procedures at 11:30 a.m. on March 13, 2023. While the meeting was scheduled to discuss the advance and discount rates to be charged by the Federal Reserve Banks, top of mind among the Governors will be the sudden collapse and FDIC seizure of SVB Financial Group (NASDAQ: SIVB) on Friday. In fact, the Fed is already said to be discussing ways to avoid panic, especially among uninsured depositors at other institutions.

Bloomberg reported on Saturday that bank regulators, including the Fed, are discussing a new special vehicle that will be designed to reassure uninsured depositors and avoid a panic at other banks.

The FDIC insures depositors up to $250,000, but many businesses that banked with SVB had millions in deposits that are now in limbo. In fact, 89% of the bank's $175 billion in deposits were uninsured at the end of 2022.

The FDIC said on Friday it will pay uninsured depositors an advance dividend within the next week. For any remaining uninsured funds, depositors will receive a receivership certificate. As the FDIC sells the assets of SVB, future dividend payments may be made to certificate holders.

Hedge funds are already smelling blood in the water and are offering 60 cents on the dollar to SVB certificate holders, according to a report from Semafor.

The Fed and other regulators are now concerned that actions by uninsured depositors at other banks can cause a similar run.

Sheila Bair, the former head of the FDIC during the global financial crisis, told Reuters that “these banks that have large amounts of institutional uninsured money...that’s going to be hot money that runs if there’s a sign of trouble."

SVB was the largest bank failure since the 2008 financial crisis. It was the 16th largest bank in the U.S at the end of 2022. Trouble started last week when the company announced on Wednesday evening that it was seeking to raise $2.25 billion after selling substantially of its available-for-sale securities portfolio at a loss of $1.8 billion. The disclosure of the trouble had depositors running for the exits. Depositors reacted by initiating withdrawals of $42 billion in deposits on March 9, 2023, causing a run on the bank. As of the close of business on March 9, the bank had a negative cash balance of about $1 billion. Amid the bank run, the company was not able to complete the share sale which led to regulators seizing the bank on Friday, March 10, 2023.

By StreetInsider.com Staff

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