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Published: Mar 14, 2023
Updated: Mar 14, 2023

US Bank Depositors Rescue Package Provides Breathing Space to Banks

The US Bank depositors rescue package has been a much-needed backstop to the markets. Unlike 2008, US policymakers have learned from their past mistakes and moved early and at scale to prevent contagion risk from spreading. This article provides an overview of the US Bank depositors rescue package and its implications.

The US Bank Depositors Rescue Package:

The Federal Reserve has provided 1-year credit lines to US banks at the 1-year OIS plus 10 bps rate, at the par value of bond holdings. This move has allowed banks to postpone recognizing the $620 billion of unrealized losses due to MTM of their bond holdings for a year. This is a masterstroke that has provided much-needed breathing space to banks.

Implications for Banks:

While the rescue package has provided a much-needed backstop to the markets, it has also resulted in trouble for bank stockholders and unsecured lenders. The stockholders and unsecured lenders of SVB and Signature banks have been wiped out, and these banks are the second and third biggest US banks to fail, respectively. The fear of contagion was real, and there could have been bank runs on smaller banks, but this has been contained. Even if smaller banks see deposits being pulled out in panic mode, they can offer their bond holdings to the Fed at par and stay in business.

The Fight Against Inflation:

It is unclear what impact the US Bank depositors rescue package will have on the fight against inflation. We will have to wait until March 22nd when the Fed enters a two-week silent period before the FOMC meet. It remains to be seen if the Fed will offer any guidance on an emergency basis.

Market Impact:

Asian markets are still factoring in Friday falls and are down a bit, but US futures are up. Depositors are expected to flee to the big four US banks, albeit at a lesser pace.

Comparison with 2008:

While tax-payers are not bailing out banks as they did in 2008, this scale of ALM mismatches and mismanagement was not caught earlier and was allowed to build up. The learnings from 2008 have been used to provide a band-aid to the markets, and the situation has been mitigated. However, the situation is still smouldering under the carpet.

Impact of the rescue package needs to be monitored

The US Bank depositors rescue package has provided a much-needed backstop to the markets and breathing space to banks. The rescue package has helped prevent a contagion risk from spreading, and even if smaller banks see deposits being pulled out in panic mode, they can stay in business. The impact of the rescue package on the fight against inflation remains to be seen, and the situation is still smouldering under the carpet. Nonetheless, the lessons learned from the 2008 crisis have been put to good use, and the situation has been mitigated