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  • Writer's pictureStephen H Akin

Treasury Management

Efforts to stem systemic banking risk increases US Dollar inflationary consequences.

What is moral hazard?

Investopedia defines it this way:

In economics, the term “moral hazard” refers to a situation where a party lacks the incentive to guard against a financial risk due to being protected from any potential consequences.

Moody's now negative on U.S. banks due to 'extremely volatile funding conditions, while First Republic and other regional banks are placed under review

Moody's eyes risk of deposit outflows in uninsured deposits at U.S. banks

Moody's Investors Service on Tuesday cut its outlook on the U.S. banking system to negative from stable to reflect "the rapid deterioration in the operating environment" following deposit runs and the failures of Silicon Valley Bank, Signature Bank and Silvergate Bank.

S&P Global Ratings placed First Republic Bank A-minus rating under review for a possible downgrade. Moody's also said it was studying First Republic's debt rating for a potential downgrade, along with five other regional banks.

Debt downgrades typically raise the cost of borrowing money for companies through public bond issuances. In the case of the banks, the downgrade may make other sectors more appealing for public corporate-debt investors while requiring banks to offer higher interest rates on their bonds. A downgrade may also cloud a bank's image as a haven from more volatile sectors.

"Although the Department of the Treasury, Federal Reserve and FDIC announced that all depositors of SVB and Signature Bank will be made whole, the rapid and substantial decline in bank depositor and investor confidence precipitating this action starkly highlight risks in U.S. banks' asset-liability management exacerbated by rapidly rising interest rates," Moody's said in its sector downgrade.

Banks remain "well capitalized" to face a deteriorating operating environment, but unrealized losses on the securities they hold currently present headwinds, Moody's said.

"Profitability will decline for many banks," Moody's said.

Regarding S&P's review of its A-minus rating for First Republic Bank, "we expect the bank to increase wholesale borrowings to shore up its on-balance-sheet liquidity, which would likely weigh on its already modest profitability." the agency said in a statement.

S&P has placed the credit on CreditWatch Negative, with the latter reflecting the potential for its funding profile, revenue stability and profitability to deteriorate.

"First Republic's already modest profitability due to its loan portfolio being heavily weighted toward long-duration residential mortgages -- which have fallen in fair value as interest rates have rapidly increased -- may be hurt by the higher costs associated with the incremental wholesale funding," S&P said in the statement.

Moody's placed its debt ratings of six U.S. regional banks under review for a downgrade as it mulled "extremely volatile funding conditions" for some U.S. lenders.

The downgrade warnings on First Republic Bank (FRC), Intrust Financial, UMB Financial Corp. (UMBF), Zions Bancorp (ZION), Western Alliance Bancorp (WAL) and Comerica,Inc. (CMA) may put further pressure on regional banks after the collapse of Silicon Valley Bank, which is a unit of SVB Financial (SIVB), and Signature Bank (SBNY).

In First Republic's case, Moody's blamed the bank's high reliance on uninsured deposits and its high amount of unrealized losses, as well as a low capitalization relative to peers.

On the plus side, it gave credit to First Republic's "official sector borrowing capacity" and its strong franchise in private banking and private wealth management for high-net-worth individuals.

If the bank faced higher-than-expected deposit outflows and if liquidity backstops were insufficient, the bank could see losses on its available-for-sale (AFS) securities and its held-to-maturity (HTM) securities.

"Such crystallization of losses, if it were to happen, could materially weigh on the bank's profitability and capital," Moody's said.

Despite the introduction of the new Bank Term Funding Program by the government to backstop banks, along with additional funding from JPMorgan Chase & Co. (JPM) and the Federal Reserve for First Republic, the bank's funding "had a high beta and its deposit costs were already rising more than peers prior to contagion in bank funding markets" following Silicon Valley Bank's failure, Moody's said.

Moody's will focus its bank review on variations in deposit amounts, the outlook for profitability since the start of the year and the "stickiness" of deposits.

The rating agency will also weigh the amount of securities sold, if any, to address deposit outflows, as well as management actions to address the negative effect of potential securities losses on the bank's earnings and capital, as well as limits on asset and liability management and risk limits.

Federal Reserve Board announces it will make available additional funding to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors

To support American businesses and households, the Federal Reserve Board on Sunday announced it will make available additional funding to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors. This action will bolster the capacity of the banking system to safeguard deposits and ensure the ongoing provision of money and credit to the economy.

The Federal Reserve is prepared to address any liquidity pressures that may arise.

The additional funding will be made available through the creation of a new Bank Term Funding Program (BTFP), offering loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. These assets will be valued at par. The BTFP will be an additional source of liquidity against high-quality securities, eliminating an institution's need to quickly sell those securities in times of stress.

With approval of the Treasury Secretary, the Department of the Treasury will make available up to $25 billion from the Exchange Stabilization Fund as a backstop for the BTFP. The Federal Reserve does not anticipate that it will be necessary to draw on these backstop funds.

After receiving a recommendation from the boards of the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve, Treasury Secretary Yellen, after consultation with the President, approved actions to enable the FDIC to complete its resolutions of Silicon Valley Bank and Signature Bank in a manner that fully protects all depositors, both insured and uninsured. These actions will reduce stress across the financial system, support financial stability and minimize any impact on businesses, households, taxpayers, and the broader economy.

The Board is carefully monitoring developments in financial markets. The capital and liquidity positions of the U.S. banking system are strong and the U.S. financial system is resilient.

Depository institutions may obtain liquidity against a wide range of collateral through the discount window, which remains open and available. In addition, the discount window will apply the same margins used for the securities eligible for the BTFP, further increasing lendable value at the window.

The Board is closely monitoring conditions across the financial system and is prepared to use its full range of tools to support households and businesses, and will take additional steps as appropriate.


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For Immediate Release

All insured depositors will have full access to their insured deposits no later than Monday morning, March 13, 2023. The FDIC will pay uninsured depositors an advance dividend within the next week. Uninsured depositors will receive a receivership certificate for the remaining amount of their uninsured funds. As the FDIC sells the assets of Silicon Valley Bank, future dividend payments may be made to uninsured depositors.

March 9, 2023 to March 13, 2023 January 20, 2023 March 15, 2023

Silicon Valley Bank had 17 branches in California and Massachusetts. The main office and all branches of Silicon Valley Bank will reopen on Monday, March 13, 2023. The DINB will maintain Silicon Valley Bank’s normal business hours. Banking activities will resume no later than Monday, March 13, including on-line banking and other services. Silicon Valley Bank’s official checks will continue to clear. Under the Federal Deposit Insurance Act, the FDIC may create a DINB to ensure that customers have continued access to their insured funds.

As of December 31, 2022, Silicon Valley Bank had approximately $209.0 billion in total assets and about $175.4 billion in total deposits. At the time of closing, the amount of deposits in excess of the insurance limits was undetermined. The amount of uninsured deposits will be determined once the FDIC obtains additional information from the bank and customers.

Customers with accounts in excess of $250,000 should contact the FDIC toll-free at 1-866-799-0959.

The FDIC as receiver will retain all the assets from Silicon Valley Bank for later disposition. Loan customers should continue to make their payments as usual.

Silicon Valley Bank is the first FDIC-insured institution to fail this year. The last FDIC-insured institution to close was Almena State Bank, Almena, Kansas, on October 23, 2020.

FDIC: PR-16-2023


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