by NEW YORK (AP) – Can Washington come to the rescue of depositors at the failed Silicon Valley bank? Is that even politically possible?
That was one of the growing questions Sunday in Washington as policymakers tried to figure out whether the US government — and its taxpayers — should bail out a failed bank that largely served Silicon Valley, with all its wealth and power.
Silicon Valley celebrities and executives have hit the giant red “panic” button, saying that unless Washington comes to the rescue of Silicon Valley bank depositors, more bank runs are likely this week.
“Deposits in the US are either safe or not. If not, see below,” Craft Ventures’ David Sacks, who is closely associated with billionaires Elon Musk and Peter Thiel, wrote on Twitter on Sunday.
The Silicon Valley bank failed on Friday as anxious depositors withdrew billions of dollars from the bank in a matter of hours, forcing US banking regulators to urgently close the bank in the middle of the workday to halt the bank run. It is the second largest bank failure in history, after the collapse of Washington Mutual at the height of the 2008 financial crisis.
The Silicon Valley Bank was a unique creature in the banking world. The 16th largest bank in the country, as its name suggests, primarily served tech startups, venture capital firms and well-paid tech workers. Because of this, the vast majority of deposits at Silicon Valley Bank were in business accounts with balances well above the $250,000 insured limit.
Its failure has left more than $150 billion in deposits now in receivership, meaning startups and other businesses may be out of cash for a long time.
Employees at the Federal Deposit Insurance Corporation – the agency that insures bank deposits under $250,000 – have been working all weekend looking for a potential buyer for the failed bank’s assets. There were several bidders for assets, but the bank’s body remained in the custody of the US government as of Sunday morning.
Despite the panic emerging from Silicon Valley, there’s no sign that the bank’s collapse could lead to a 2008-like crisis. The country’s banking system is healthy, more capitalized than at any time in its history, and has undergone multiple stress tests showing that the overall system could withstand even a major economic downturn.
Additionally, the failure of the Silicon Valley Bank appears to be a unique situation in which the bank’s executives made poor business decisions by buying bonds just as the Federal Reserve was about to raise interest rates, leaving the bank uniquely exposed to a particular industry was that did this has seen a sharp contraction over the past year.
Despite being a potentially unique meltdown, Silicon Valley Bank’s demise hasn’t stopped investors from looking to other banks that may face a similar situation. Shares in First Republic Bank, a bank that serves wealthy and tech companies, have fallen nearly a third in two days. PacWest Bank, a California-based bank that caters to small and medium-sized businesses, plunged 38% on Friday.
Although the situation was unique, it was clear that a bank failure of this magnitude was a cause for concern. Treasury Secretary Janet Yellen and the White House have been “closely monitoring” developments. the governor of California has spoke to President Biden; and now bills have been proposed in Congress to raise the FDIC insurance limit to temporarily protect depositors.
“I’ve been working with our banking regulators all weekend to draft appropriate guidelines to address this situation,” Yellen told Face the Nation on Sunday.
But Yellen made it clear in her interview that Silicon Valley is wrong to expect Washington to come to its rescue. When asked if a bailout was on the table, Yellen said, “We won’t do that again.”
“But we are concerned about depositors and focused on meeting their needs,” she added.
Sen. Mark Warner, D-Virginia, said on ABC’s This Week that it would be a “moral hazard” to potentially bail out Silicon Valley’s uninsured depositors. Moral hazard was a term often used during the 2008 financial crisis for why Washington shouldn’t have bailed out Lehman Brothers.
The growing panic narrative among tech industry insiders is that many companies that have stored their working capital with Silicon Valley Bank will be unable to make payroll or pay office expenses for the coming days or weeks if these uninsured deposits not be released. But the FDIC has said it plans to pay an unspecified “advance dividend” — that is, a portion of uninsured deposits — to depositors this week, and said further advances will be paid if assets are sold.
Ideally, the FDIC will find a single buyer of Silicon Valley Bank’s assets, or maybe two or three buyers. It’s also likely that the bank will be sold off in stages over the coming weeks.
Todd Phillips, a consultant and former attorney with the FDIC, said he expects uninsured depositors to likely recover 85% to 90% of their deposits if the sale of the bank’s assets goes ahead in an orderly manner. He said it was never Congress’ intention to protect business accounts with deposit insurance — the theory is that businesses should do their bank due diligence when storing their cash.
Protecting bank accounts to include corporations would require legislation from Congress, Phillips said. It’s unclear if the banking industry would also support higher insurance limits, since FDIC insurance is paid for by ratings by banks, and higher limits would require higher ratings.
Philips added that the best thing Washington can do is communicate that the entire banking system is safe and that uninsured depositors will get most of their money back.
“People in Washington need to take a firm stand against the narrative on Twitter that is coming out of Silicon Valley. If people realize that they will get 80% to 90% of their deposits back, but it will take a while, it will do a lot to stop a panic,” he said.
