Svb, here is the US bailout for depositors (impossible in the EU)
What American institutions have decided on Silicon Valley Bank and what would not be possible in the European Union. Giuseppe Liturri's analysis
In the hours in which Wall Street seems to be withstanding the impact of the sale of bank shares and the cordon sanitaire set up by the US authorities seems to have prevented and isolated a ruinous bank run by depositors, it is appropriate to reflect on what has been decided by the US Treasury and by the Federal Reserve and the Bank Deposit Guarantee Fund .
All that has been done overseas is a mere chimera for the Eurozone, which does not even have a common deposit guarantee fund. Nothing or little that has been effectively done by the US authorities could have been done in Europe, in the presence of a banking crisis.
Let's go in order. There are two pillars of the manoeuvre: no depositor (even those over $250,000, initially unsecured) must lose a cent and taxpayers must not cover the losses of banks in difficulty or in outright bankruptcy. To achieve this result the guarantee fund (FDIC) has taken control of the banking firms (Silicon Valley Bank and Signature Bank) involved and will immediately pay all depositors up to $250,000 who already benefit from the guarantee. The excess part, also exceptionally guaranteed, will be available at different times and with different technical forms. SVB's assets are roughly equal to those of Banco BPM, or a third of Unicredit and a quarter of Intesa, just to get an idea of the size.
The FIDC will have all the necessary financial resources, because behind it is the US government and the unlimited financial capacity of the Fed. " Whatever it takes ," President Joe Biden reiterated earlier in the day.
The taxpayer will not see a burden on the federal budget because the FIDC will proceed to the orderly sale of all assets held by failing banks and with those funds will repay the US government and the Fed and, if it realizes losses, other US banks will be required to cover the loss “as required by law”. So no bail-out, i.e. saving from outside by the State. But instead bail-in (rescue from within) against shareholders and subordinated bondholders who will probably lose all their invested capital. But depositors remain free up to the last cent.
Finally, the Fed has made available a special "parachute" funding line for banks, should they experience liquidity problems to deal with deposit withdrawals. In that case, they would not be forced to sell assets realizing losses – as happened to the SVB – but could access the Fed's line. Furthermore, the banks could provide securities (public and non-public) valued at their "face value" as collateral. ”, therefore without taking into account the probable lower market value, thus increasing the ability to access those funds.
These decisions have established an important principle, drawn an insurmountable red line that has been canceled in Europe with the bail-in directive: bank deposits are as safe as a banknote. $100 deposit will always be equivalent to the Benjamin Franklin bill. At least in their face value before inflation.
It should not be forgotten that we come from an increase in rates in the USA with few precedents for speed and intensity (450 basis points in 9 months), while the ECB increased by 300 points starting from July. It is plausible that some banks have found themselves with problems with the cost of deposits that are not aligned with the proceeds of assets and with depositors who suddenly withdraw funds in pursuit of increasing returns.
And the markets understood, with the US stock market in slightly positive territory for most of the day but with three other banks (First Republic, Western Alliance and Pacific West) posting losses of up to 70% before recovering to -50% . But these are movements that reflect the (declining and problematic) profitability prospects for shareholders, while deposits are safe.
In Europe, knock on wood, what would have happened? The single resolution fund (SRF) would have intervened which, however, would have asked, after zeroing out unsecured shareholders and bondholders, also the sacrifice of depositors over €100,000. Provoking that systemic financial instability – with a veritable run on the banks of depositors in search of a solvent bank – which they wanted to nip in the bud with the decisions of Sunday evening in New York.
But the SRF could also not have been sufficient, because it has limited resources and, for this reason – with the reform of the Mes not yet ratified by Italy – it could have access to a "parachute" loan disbursed by the Mes. It is a pity that – as recently also observed by professor Francesco Giavazzi – we are always dealing with limited resources, and unlimited ones only a lender of last resort such as a central bank can guarantee. Then what would happen? No one knows, but many suspect that it would be up to the state to intervene again. What cannot be done in the beginning, avoiding the spread of panic and the self-fulfilling prophecy that destroys bank balance sheets, will have to be done in the end, in the smoking rubble. We prefer to let the wave build until it becomes a tsunami, ignoring that in the banking sector, trust is the most important part of assets.
And the common guarantee on deposits in the Eurozone – the third leg of the Banking Union – where is it? The Commission's proposal dates back to the end of 2015 (!?) and, since then, it has wandered from one Eurogroup meeting to another. He would have formed a single package with the reform of the Mes – at least that's what Giuseppe Conte had led us to believe in 2019 or so they had led him to believe in Brussels and he had also believed it – but then the application obstacles turned out to be insurmountable and even the President of the Eurogroup Paschal Donohoe has thrown in the towel .
Only the Mes remained on the table, which for the markets is equivalent to a fine target exposed on the front of the States. Exactly the opposite of what has been done in the US where they have tried to nip the markets' shooting in the bud.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/svb-usa-ue-bail/ on Mon, 13 Mar 2023 19:28:50 +0000.