Prices for bitcoin, gold and silver soared today following a US government bailout of the depositors of Silicon Valley bank (SVB).
At $24,049, bitcoin registered a 15 percent one-day rise. Gold hit $1,911 a troy ounce, up 1.85 percent in 24 hours, while silver rose 5.64 percent to 21.81 a troy ounce.
Last night the Treasury, Federal Reserve and Federal Deposit Insurance Corporation (FDIC) said they would backstop all the depositors of SVB, which was taken over by California banking regulators on Friday.
93 percent of SVB’s $161bn in deposits had been uninsured (they were above the $250k limit for deposits insured by the FDIC) and those uninsured deposits were reportedly trading over the weekend at between 55 and 90 cents in the dollar.
The federal authorities’ decision to underwrite the whole deposit base of the bank flew in the face of post-2008 financial regulation, according to which uninsured depositors of an insolvent bank are supposed to be ‘bailed in’ (suffer losses according to a hierarchy of creditors).
The authorities said they would seek to recover any shortfall resulting from the sale of SVB’s assets from other banks.
“Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law,” the Treasury, Federal Reserve and FDIC said.
The federal authorities’ decision to underwrite the whole deposit base of the bank flew in the face of post-2008 financial regulation
“Shareholders and certain unsecured debtholders will not be protected. Senior management has also been removed,” they said.
The regulators also said they were shutting Signature bank, which together with SVB and Silvergate bank were the main bank counterparties for cryptocurrency firms seeking to do business in dollars.
Silvergate went into voluntary liquidation on Thursday following a collapse in its share and debt prices.
USDC, the $40bn dollar stablecoin issued by Circle, which had lost its dollar peg over the weekend over concerns it had suffered losses on its deposits held at SVB, recovered to par value.
Circle’s CEO, Jeremy Allaire, said earlier today that the stablecoin’s new business arrangements would open for business this morning, with automated settlement of USDC transactions via a new partnership with Cross River Bank.
The federal authorities said that no losses associated with the resolution of Silicon Valley Bank would be borne by US taxpayers.
However, some market analysts said a new lending facility put in place last night to help US banks obtain funding against their assets was equivalent to a hidden bailout.
Under the Bank Term Funding Program, lenders that pledge collateral, including US government bonds and other qualifying assets, will be able to obtain loans from the Federal Reserve, with the facility backstopped for up to $25 billion by the US Treasury.
For the purposes of the loans, collateral will be valued at par (face value), the authorities said.
“Forget about SBV liabilities for a second: the real bailout story is the regime change in the Fed’s treatment of collateral,” Daniela Gabor, professor of economics at UWE Bristol, said today.
“Par value goes against every risk management commandment of the past 30 years. It turbocharges the monetary power of collateral,” Gabor said.
In previous bailouts, such as the European Central Bank’s introduction of a lender of last resort facility for Greece in 2011, collateralised loans were given against the market value of debt, which often traded at a steep discount to the face value.
“The US Treasury providing a $25bn ‘credit protection’ to the Fed is just a ‘hush the Germans’ handwave,” said Gabor.
Sign up here for the New Money Review newsletter
Click here for a full list of episodes of the New Money Review podcast: the future of money in 30 minutes
Related content from New Money Review
Silicon Valley bank run depegs USDC
Why stablecoins disrupt the financial plumbing
Russia sanctions hit London gold market
