top of page
BW-2020logo.png
Writer's pictureBrady LaRoe

Silicon Valley Bank Depositors to be Guaranteed Full Funds by the Federal Government



The past week has been mired with the collapse of Silicon Valley Bank and First Republic Bank, both of which were major regional banks in California. The collapse of SVB marks the largest bank failure since 2008, caused by depositors withdrawing their money after questions over their ability to insure deposits arose.



Traditionally, there has not been much public concern over banks ability to cover deposited funds, as the Federal Government insures such deposits; however, that insurance only covers up to $250,000 per depositor. In Silicon Valley Banks' case, they primarily work with large companies that have much larger accounts with them. Specifically, 98% of all money in SVB was uninsured.


This posed a problem for the US government. SVB is the 16th largest bank in the country, and First Republic Bank is the 14th. Their failure could harm many large companies and cause further bank runs to happen throughout the country.


In response to the situation, on Sunday The Federal Reserve, Treasury Department, and FDIC announced that they would be backing all deposits at Silicon Valley Bank and First Republic Bank in full. The Federal Reserve also announced a $25 billion “Bank Term Funding Program”, which is a new one year loan program offering lighter terms than their traditional loans.


The announcement seemed to cool some of the market's worries, as bank stocks partially rebounded after the news.


The news also drew criticism from many, calling it a “bailout” of large banks that took on too much risk. Expert at the University of Pennsylvania Christina Parajon Skinner says that the response could lead to more risky behavior on the part of banks if they believe they will be backed up by the government, and that this situation could cause “moral hazard”.


The government has responded saying what they are doing is not a bailout. On Monday, Biden stated “This is an important point: No losses will be borne by the taxpayers,” in reference to the funding of the deposits. The money will instead be coming from The Deposit Insurance Fund, which is funded by fees from institutional banks and interest from government bonds.


Treasury Secretary Janet Yellen echoed that position on Tuesday, saying "During the financial crisis, there were investors and owners of systemic large banks that were bailed out," she continued, "And the reforms that have been put in place means that we're not going to do that again.”


Some still remain skeptical of this though. Professor at Harvard Jason Furman, and former economic advisor to President Obama, said in a Tweet that “Make no mistake – it does have an expected cost to taxpayers”.


Others say that this is a regulatory issue that shouldn’t have happened, pointing to deregulation of rules put in place after 2008. Economist at MIT Simon Johnson says that “The Silicon Valley Bank situation is a massive failure of regulation and supervision”.


The Federal Reserve announced Monday that they would be conducting a review of “the supervision and regulation of Silicon Valley Bank”. Head of The Federal Reserve Jerome Powell said in a statement “The events surrounding Silicon Valley Bank demand a thorough, transparent, and swift review by the Federal Reserve,”. The review will be released and made public by May 1st.


Sources:


20 views

Comments


bottom of page