In the last 72 hours, the government took over two US regional banks. But within these two the biggest bank is Silicon Valley Bank which is the main provider of banking services to many VCs along with their portfolio companies with no geographical restrictions.
Though there were foul play rumours, going through the details it has nothing different than the issues that occurred at Silvergate another bank that collapsed a month ago. The problem with regional banks is that their lower regulation leads to lower supervision in risk management.
The main issue is that these banks majorly depend on deposits and those are invested in securities that are classified as Held To Maturity ( HTM ) this leads to stable balance sheets. But the losses in them are not moved through P&L making them unrealised losses.
This could be ok in an environment of high liquidity and low-interest rate but in the current situation, it becomes a time bomb that ticks much faster. And the series of such collapses will create a domino effect in the startup, cryptocurrency and commercial real estate as regional banks are the main banking services providers to these industries.
The Treasury Department and Federal Reserve are aware of higher possibilities of such collapses in near future and have come out with Bank Term Funding Program. This is a liquidity and not a bailout program in which troubled banks can access liquidity against the securities without selling them.
Though this solution provides much-needed relief and certainty to depositors. It also made clear that shareholders and bondholders of such banks will not be compensated in any manner through a bailout in situations that are likely to become more frequent in the months ahead.