Aftermath of Silicon Valley Bank Collapse: Decisive Actions by Government and Federal Reserve
The collapse of Silicon Valley Bank (SVB) last Friday represents the second-largest bank failure in U.S. history and the first since the 2008 financial crisis.[0] SVB, a financial pillar of the startup world, was heavily invested in normally secure bonds, but rising interest rates lowered the value of the bank's bonds.[1] This, combined with venture capital drying up, forcing startups to draw down funds held by SVB, created a classic bank run.[2]
The FDIC normally insures deposits up to $250,000, but made an exception when SVB and Signature Bank collapsed, guaranteeing all deposits at both banks.[3] SVB's clients were in a bind because federal insurance only covers deposits up to $250,000, and almost 93 percent of SVB’s deposits were not insured.[4]
Due to the uproar and the potential for the crisis to expand, the FDIC, Treasury Department and Federal Reserve took drastic action on Sunday, announcing that the FDIC would insure all deposits of Silicon Valley Bank, even those which exceed the usual limit of $250,000.[5] The Fed also announced a $25-billion backstop for the failing banks to pay their depositors and opened up a facility to make funding available for other financial institutions in the form of one-year loans, to limit contagion across the banking sector and to stave off other bank runs.[6]
The American government also announced the close of New York-based Signature Bank, while assuring its depositors that their deposits would also be made fully available for withdrawal, if needed.[6]
At the same time, the Fed may rethink further interest rate increases at its next meeting later this month, as rising rates were the source of SVB’s problems.[7] The Treasury Department, the Federal Reserve, and the FDIC are taking “decisive actions” to protect the economy and shore up confidence in the banking system, and President Joe Biden has sought to reassure Americans that the banking system is sound.[8]
The bank’s failure has caused many anxieties to remain, and people are monitoring how the Federal Reserve reacts. As the bank struggles to keep enough cash to cover withdrawals, it had to sell bonds at a $1.8 billion loss—causing even more depositors to lose faith in the bank and head for the exits.[3]
0. “Cheering Silicon Valley Bank Bailout, Gavin Newsom Doesn't Mention He's a Client” The Intercept, 14 Mar. 2023, https://theintercept.com/2023/03/14/cheering-silicon-valley-bank-bailout-gavin-newsom-doesnt-mention-hes-a-client/
1. “What happened with SVB? Republicans blame collapse on diversity. Huh?” USA TODAY, 15 Mar. 2023, https://www.usatoday.com/story/opinion/columnist/2023/03/15/silicon-valley-bank-failure-republicans-blame-diversity-woke/11472710002/
2. “Silicon Valley Bank: Who's to Blame?” City Journal, 13 Mar. 2023, https://www.city-journal.org/silicon-valley-bank-who-is-to-blame
3. “After Silicon Valley Bank Fallout, Is Your Money Safe?” TIME, 13 Mar. 2023, https://time.com/6262567/money-safe-silicon-valley-bank/
4. “Silicon Valley Bank Bailout is Socialism for the Rich” Washington Free Beacon, 13 Mar. 2023, https://freebeacon.com/columns/silicon-valley-bank-bailout-is-socialism-for-the-rich
5. “Silicon Valley Bank: How a digital bank run accelerated the collapse” ABC News, 14 Mar. 2023, https://abcnews.go.com/Business/silicon-valley-bank-digital-bank-run-accelerated-collapse/story?id=97846569
6. “How Do Bank Rescues In India Fare Versus The U.S.?” BQ Prime, 14 Mar. 2023, https://www.bqprime.com/opinion/how-do-bank-rescues-in-india-fare-versus-the-us
7. “Top economist Mohamed El-Erian says unlimited deposit guarantee will be hard to reverse after SVB fallout: ‘We are now in a different world’” Yahoo Life, 13 Mar. 2023, https://www.yahoo.com/lifestyle/top-economist-mohamed-el-erian-173250380.html
8. “Silicon Valley Bank bailout: Did the government just bail out SVB and Signature?” Vox.com, 13 Mar. 2023, https://www.vox.com/money/2023/3/13/23638417/svb-bank-bailout-signature-fed-fdic-treasury-janet-yellen
