Federal Reserve and the Exchange Stabilization Fund
Silicon Valley Bank’s failure will be scrutinized and is somewhat unique due to its exposure to tech start-ups. Signature Bank was known for exposure to the Crypto markets. In response to the failures, the Federal Reserve has announced making additional capital available to “eligible financial institutions” to ensure that depositors can withdraw funds. As of the date of this writing, the Fed has committed $25 Billion from the Exchange Stabilization Fund.
While we await the fallout from the Silicon Valley Bank and Signature Bank, it can be instructive to reflect upon the 2008 financial crises and the lessons learned from them. Particularly, today’s consumers and investors can take some solace in the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) and Troubled Asset Relief Program (TARP) program. The TARP, which provided capital and asset guarantees to over 800 banks, was demonized for “bailing out” banks that utilized infirm underwriting standards and were over-leveraged. However, TARP provided substantial security to the banking system. Second, more than 200 banks received additional funds via the Capital Purchase Program ($205 Billion distributed to over 707 banks). Third, the federal government’s ability to respond to financial crises is substantially better. To wit, the government can now utilize a mix of liquidity programs (to keep credit flowing); Guarantee programs, and recapitalization strategies.
The Fed’s aggressive action on Sunday to reassure the public, with substantial back-stop funds highlights that it will use all of the tools provided by Dodd-Frank and other legislation, to avert another crisis.
