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Why didn't Silicon Valley Bank (SVB) ask for a loan from the Federal Reserve as the lender of last resort?

Why did they, in order to give customers cash for withdrawals from deposit accounts, sell long-term bonds at a huge loss and then go into liquidation causing ripples of instability across the whole market?

Why was Credit Suisse, very recently, able to give their customers their funds to the tune of a whopping $54bn.

Is the Swiss central bank, Swiss National Bank, more lenient than the US central bank?

2023-03-16 BBC: Credit Suisse to borrow up to $54bn from Swiss central bank

Sorry if this is not the right Stack Exchange. There seems to be no general "finance" related stack exchange; only two specialized "personal finance" and "quantitative finance".

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Because that would be a bailout and the US government [regulators] said "no bailouts" in this case. Now the FDIC owns all of the banks assets (as a bridge bank) and is trying to sell them (at auction). Hundreds of banks [were] dealt with like this after 2008.

BTW, it's actually not that clear cut in this case that it wasn't a bailout of sorts, because the rules were bent with respect to max deposits:

However, the Treasury Department, the Federal Reserve, and the FDIC announced they would make sure all depositors with accounts at SVB and Signature Bank would have access to their funds by the next day – beyond just the $250,000 guaranteed by the FDIC.

In my reading, the bank's customers were essentially bailed out, but the bank itself wasn't. But the "no bailouts" slogan still does explain well enough why the bank was not given the kind of loan you ask about. (I suspect that one of the practical differences is that SVB's management won't be able to give itself bonuses from that. At least one Representative said something along those lines, i.e. "no sympathy" for the bank's management.)

Some former FDIC officials even criticized this move, saying that a $200 billion bank in a $23 trillion system (i.e. ~1%) didn't even justify that. For some level of comparison, the banks that failed 2007-2015 and were auctioned by FDIC had at least $500 billion in deposits (and $700 billion in assets) as a group.

Credit Suisse has assets of at least $500 billion and of course that's a larger share of the Swiss banking sector, which seems to be around $3 trillion. (Credit Suisse is also listed as a "bulge bracket bank".) There are probably other differences relating to solvency etc., but I doubt the Swiss government could let Credit Suisse fail as easily even if it were insolvent.

Also, according to one expert, Credit Suisse or any large European [or even large US] bank can't run into the [exact] same issue as SVB because Basel 4 regulations limit "how much rate mismatching they can take on their held-to-maturity bond portfolios". And such banks "must deduct unrealised losses on securities accounted at fair value from their regulatory capital", whereas "Small banks like SVB can avoid taking negative mark-to-market on bonds portfolio against their CET1 [Common Equity Tier 1], artificially bolstering their solvency capital." So, from what I could gather, SVB reported a CET1 of 15.26% for Q4 2022, which is actually better than Credit Suisse's 14.1%, if the [different] accounting standards are not taken into account.

And that loan from the Swiss central might not be enough. News is now that UBS is in talks for a takeover of Credit Suisse and that

UBS is said to have asked the Swiss government to cover about $6bn (£4.9bn) in costs if it were to buy Credit Suisse, according to sources quoted by Reuters.

And yeah, the potential bill for the takeover which seem almost certain now unless blocked by some other regulators went up a bit, and simultaneously the face value of the bank went down...

Credit Suisse shareholders were deprived of a vote on the deal and will receive one share in UBS for every 22.48 shares they own, valuing the bank at $3.15bn (£2.6bn).

At the close of business on Friday Credit Suisse was valued at around $8bn (£6.5bn).

The federal government said in order to reduce any risks for UBS it would grant a guarantee against potential losses worth $9.6bn (£7.9bn)

The Swiss central bank has also offered liquidity assistance of up to $110bn (£90bn).

In the end the solution doesn't seem that different from what happened to the SVB. As I recall now, SVB also got some $15 billion loan last year from a Federal Home bank, but that wasn't enough. Also, there was a price to pay as the saying goes:

SVB Financial Group had $15 billion of outstanding loans from the Federal Home Loan Bank of San Francisco at the end of 2022—it had none a year earlier—and pledged collateral of almost three times what it borrowed to back the advances.

The loans helped shore up SVB’s liquidity and appear to have coincided with a $25 billion, or 13%, decline in deposits at SVB during the final three quarters of 2022. [...]

Federal Home Loan Banks, also known as FHLBs, were founded to help support housing finance during the Great Depression. Now they direct cash into the banking system, using their implicit government backing to borrow money cheaply.

Those kinds of loans have continued for other bank, of course, the Fed announced $12 billion just a couple of days ago, and more the day before: $152 billion!

According to data made available Thursday, the Fed drew an additional $152 billion in short-term borrowing for banks from its standing loan window, the traditional liquidity backstop for lenders, a dramatic increase against the roughly $5 billion from the previous week.

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So yeah, different horses for different courses. Here's a bit more about the borrowing from the Fed.

Banks borrowed $152.85 billion at the Fed on Wednesday, up from $4.58 billion a week before, according to new data released Thursday. The daily average for borrowing last week was $85 billion, compared with $4.4 billion a week earlier, and the most since the 2008 financial crisis.

Meanwhile, the Federal Home Loan Bank system had its biggest day of issuance ever on Monday, issuing $112 billion worth of debt to fund requests from banks looking to solidify their balance sheets.

Banks tapped the Fed’s new funding program for $11.94 billion on Wednesday. The two banks that failed last week borrowed another $142.8 billion. [...]

First Republic Bank announced Sunday it had received funding from the Federal Reserve and JPMorgan Chase, as it tried to convince investors and customers it was stable. The bank didn’t explain what the funding from the Fed was, but the only option would have been the discount window. The bank said Thursday it borrowed from the Fed as much as $109 billion overnight.

Banks are generally skittish about using the discount window and especially afraid of it becoming public. The program is known as the industry’s lender of last resort, offering overnight loans that banks can use to ease a liquidity issue. The Fed would reject an insolvent bank from borrowing, but the program has long carried a stigma that to need the discount window is a sign of dire trouble.

Borrowing is secret and names are withheld for two years, but borrowing has been largely nonexistent since the financial crisis. It spiked briefly in the pandemic, when a group of the biggest banks said they would borrow publicly in an attempt to ease the stigma.

TBH, it is slightly confusing how the secrecy goes along with the reveal we just read (as two years didn't pass.) WSJ didn't explain exactly how they knew who had borrowed. But it's interesting that bridge banks can still do that borrowing, and that they're apparently not considered entirely insolvent... by the Fed.

And as Reuters claims, the one-day record was broken:

The discount window jump crashed through the prior record of $112 billion in the fall of 2008, during the most acute phase of the financial crisis.

Including more than $140 billion in other funding provided to the new bridge banks for Silicon Valley Bank and Signature Bank established by the Federal Deposit Insurance Corp, the central bank's total balance sheet mushroomed by roughly $300 billion in the last week. That reverses a substantial portion of the balance sheet reduction accomplished since last summer.

I added that last para because I wasn't sure from WSJ's reporting whether the lending went to the bridge banks or to the [prior] banks before the failed, but it's confirmed it went to the bridge banks.

It might be the case the Fed "leaked" the info about which banks got the most of those funds to calm fears:

"The numbers, as we see them right here, are more consistent with the idea that this is just an idiosyncratic issue at a handful of banks," said Thomas Simons, money market economist with investment bank Jefferies. The government's support efforts appear likely to work and the size of the numbers reported by the Fed Thursday suggest "it's not like a huge system-wide problem," he said.

But I guess that also makes the "no bailout" much more of a bailout, LOL. In fact, that $142 billion tops what Credit Suisse was promised in the latest announcement (that included its takeover)--$110bn.

There's also a bit more about the new facility (the one that lent $12 billion in one day) in the latter piece, but I'm omitting it here as not so relevant to the Q at hand.

As discussed in a background article from January 2023, the Fed also lowered the DW borrowing costs at the start of the pandemic, and made the "overnight" be 90 days actually.

the premium of the primary credit DW rate over the top end of the federal funds target range was reduced from 50 basis points to zero, ending the penalty cost of borrowing from the DW relative to market funding sources, or other alternatives such as the Federal Home Loan Banks (FHLBs). Second, the maximum term of primary credit was extended from an overnight tenor—the typical limit—to ninety days, with the option to prepay at any time. These policy changes made DW borrowing more economical and flexible, and they remain in effect today.

I guess that kind of short term funding would not have been useful for SVB to save itself, but I'm not entirely sure. Anyhow the fact that they went to the FHLB instead does suggest they envisaged a longer-term problem:

Prior to the pandemic, small banks came to the DW on an ad hoc basis when they had a need for overnight borrowing to meet an unanticipated funding shortfall. When anticipating a more durable need for short-term funds, small banks typically borrowed for term from the FHLBs. Due to their limited sophistication, small banks are not active borrowers in the fed funds market.

One commentator from the BPI says that it's not even clear when these ($143 billion) loans were given to the two banks:

As far as I know, the Fed has provided no other information on these loans. The loans may largely be discount window loans that had been extended to the institutions before they closed.

FWTW, Paul Krugman did call it a bailout, and these $143 billion didn't even enter into his reasoning. He calls it a bailout simply because all deposits were post-facto covered by FDIC, in excess of prior insurance/promises.


I don't have data for how stigmatizing it is use the (brand new?--at least using 2022-approved terms) Public Liquidity Backstop (PLB) of the Swiss National Bank, which was what was actually what used for CS+UBS now, but it's worth noting that, historically, it's been stigmatizing to use the DWF in the US:

Armantier et al. (2011) provide empirical evidence for the willingness of banks to pay a premium of 44 basis points on average in TAF auctions from March 2008 onwards to avoid borrowing from the Fed’s DWF, which increased after the Lehman bankruptcy to 143 basis points. The magnitude of stigmatization of the DWF was substantial. It amounted to a deliberate increase in the banks’ borrowing costs by up to 32.5 percent of their net income during the crisis, in order to avoid accessing the stigmatized standing facility.

In the Eurozone, the stigmatization of the European Central Bank’s (ECB’s) lending facilities was less severe, because the usage of the ECB’s standing facility, the marginal lending facility, was less rare in normal times than the usage of the Fed’s DWF. Nevertheless, there is evidence that the ECB lending facilities may also have experienced some stigmatization. Cassola et al. (2013) find that banks were willing to borrow at average premia of up to 30 basis points over the average overnight unsecured interbank lending rate (EONIA) via the ECB’s regular Main Refinancing Operations (MROs) by the end of 2007, which indicates a stigmatization of the ECB’s marginal lending facility.

So while it's still unclear when those two US banks took those $143 billion from DWF, it's clear why that isn't trumpeted in the US.

(Somewhat side, insofar I was not able to find out the exact terms of the Swiss PLB.)

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    Didn't they say no bailouts after the failure and not before when they could have been asking for a loan?
    – Joe W
    Mar 16, 2023 at 13:33
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    It was also a 'bailout' of the bank's employees and executives as they were allowed to keep their jobs, rather than terminated on the spot after transferring the deposits to another bank. Though for now it's not clear how long SVB would be allowed to operate as an independent entity. Mar 17, 2023 at 15:12
  • A market rate loan before the collapse wouldn't have been a bailout though, by most definitions anyways. The new Bank Term Funding Program they've implemented to try and avoid a repeat is basically a standing offer to do exactly that. SVB had deeper problems that meant such a loan wouldn't save them, like user253751's and Nobody's answer explain.
    – mbrig
    Mar 17, 2023 at 17:58
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    @mbrig What would the market rate for a load to SVB be - commercial loans include premium for risk of failure - so market rate here would not be found. If for current inter bank rates then that is subsidising SVB so surely would have beed a bailout
    – mmmmmm
    Mar 17, 2023 at 18:50
  • @mmmmmm neither the BTFP loans nor the Fed's repo "loans" look at failure risks, I guess because they figure taking the bonds as collateral + regulations on banks set it close enough? But I don't disagree... though that implies the BTFP is basically a continuous ongoing bailout-on-demand program.
    – mbrig
    Mar 17, 2023 at 20:18
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The math on a loan from the Fed may not have worked out

A loan from the Fed would have to be paid back at current interest rates. Meantime, SVB is getting payments from long-dated bonds that it bought when interest rates are lower. Because long-term interest rates are usually higher than short-term interest rates, SVB has some cushion here, but if the jump in interest rates is large enough, then the bonds won't produce enough revenue to service the loan, even if the bank is allowed to hold them to maturity.

The conclusion here, which may be relevant to the argument playing out in the comments to user253751's answer, is that when a bond's value goes down due to rising interest rates, that represents a real loss of value, not, as some here have suggested, a technical artifact of accounting. Yes, SVB would eventually get its money back if it held the bonds to maturity, but if it doesn't have the cushion to last that long, then it is insolvent. The whole point of capital sufficiency requirements is to identify banks that don't have that cushion and wind them up in an orderly fashion, before it turns into a crisis.

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  • I guess following the logic of the question, SVB would be assumed to have asked about a loan at very favorable conditions (i.e. with interest rates similar or below to the ones they were holding). This would have been a bailout. If only the question would be formulated more precise. It's basically only asking why SVB wasn't bailed out by the government. Mar 17, 2023 at 17:21
  • @Trilarion no, not necessarily. The new Bank Term Funding program is basically a standing offer to do exactly what OP is asking about, the Fed lending banks cash for (depressed value) bonds. But it works for other banks and not SVB because those banks can afford to cover the loan costs until they recover liquidity.
    – mbrig
    Mar 17, 2023 at 17:57
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SVB was insolvent; its assets were less than its liabilities. Even if all its stuff was sold there wouldn't be enough money to pay all the depositors - even though it may have pretended there was, by not updating the asset values on its balance sheet.

If there isn't enough money to pay all the depositors now, why should the Federal Reserve expect there should be enough money later when the loan has to be paid back?

You may object: it can just wait until its treasury bonds mature, since bonds regain their full value when they mature, and then it can pay back the loan. But the interest rate on the loan would necessarily be higher than the rate the treasury bonds gain value, so that doesn't work.

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  • I'm hardly a banking expert but regarding Credit Suisse, allegedly "You only need to look at the price paid for its shares compared to its book value: the ratio is 0.15. In other words, the market thinks 85 per cent of its assets are not worth paying for." afr.com/chanticleer/… So, is it doing much better than SVB in that regard? IDK. Mar 16, 2023 at 15:32
  • The ROE of Credit Suisse (at least on the NYSE) seems to have been less than that of SVB (-12.88% vs 8%; Wikipedia even lists a [higher]((en.wikipedia.org/wiki/Silicon_Valley_Bank)) figure for the latter of some 13.8%). And "CS's ROE % is ranked worse than 98.82% of 1439 companies in the Banks industry" whereas SVB's was about par ("better than 50.03% of 1439 companies in the Banks industry"). Mar 16, 2023 at 15:52
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    "If there isn't enough money to pay all the depositors now, why should the Federal Reserve expect there should be enough money later when the loan has to be paid back?" SVB is insolvent because the fair market value of its long term bonds fell when interest rates went up, even though the sale of those bonds was not anticipated and SVB had planned to hold them to maturity. This 'technical insolvency" is equivalent to changes in publicly held stock prices that change over time even though no stock is bought or sold. If interest rates fell SVB's insolvency would have become much smaller or ended.
    – ohwilleke
    Mar 17, 2023 at 2:53
  • Well, the Fed just lent $142.8 billion to the two "failed" bridge banks (one of which was SVB), so that makes this answer more wrong than right. See quotes added to my answer. Mar 20, 2023 at 3:37
  • But I guess that also makes the "no bailout" much more of a bailout, LOL. In fact that tops what Credit Suisse was promised in the latest announcement (that included its takeover), i.e. $110bn. Mar 20, 2023 at 3:43

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