It turns out Silicon Valley Bank (SVB) was just the latest example of the banking system’s “too big to fail” problem.
Depositors at the commercial bank, largely unknown to the public until its abrupt downfall on March 10, received an unusual promise by federal banking regulators yesterday (March 12) that they will be made whole even for the losses uninsured by the government.
SVB was the go-to bank for many startups and venture capital firms in the Bay Area, holding more than $212 billion in assets as of late 2022 before a bank run began draining its deposits. SVB was ordered by federal regulators to shut down on March 10, making it the largest banking failure in the U.S. since the 2008 financial crisis. Fearing its collapse could cause widespread chaos in the financial system, the Federal Reserve, the Treasury Department and the Federal Deposit Insurance Corporation (FDIC) said in a joint statement yesterday the government would back SVB’s deposits beyond the federally insured cap of $250,000. For many depositors, like Roblox and Roku, which had millions in the bank, it was a welcome respite.
The regulators said they decided to make a “systemic risk exception” for SVB because of the potential economic damage it could cause if left unsaved. They made a similar case for Signature Bank, a New York regional bank closed by state banking regulators yesterday. Signature was a popular funding source for cryptocurrency companies. It began seeing a run on deposits following the shutdown of Silvergate Capital, a large crypto bank that declared insolvency last week.
“We are taking decisive actions to protect the U.S. economy by strengthening public confidence in our banking system,” said the statement from Fed Chair Jerome Powell, Treasury Secretary Janet Yellen and FDIC Chair Martin Gruenberg.
“Too big to fail” is a premise that certain corporations are so deeply ingrained in an economy that they must be supported by governments when facing failure in order to prevent an economic disaster. The concept is popularized by the 2008 subprime mortgage crisis when the U.S. government bailed out troubled investment banks by purchasing billions of dollars worth of their toxic assets. Critics saw the government’s decision is counterproductive to the banking industry and unfair to taxpayers, who ultimately funded the bailout.
The Fed said it’s not a bailout.
In the joint statement, the Fed, Treasury and FDIC said the resolution is not a bailout and promised there will be no taxpayer costs associated with any relief plans.
To reimburse depositors, the FDIC will use its Deposit Insurance Fund, which collects quarterly fees from FDIC-insured financial institutions. Currently there is more than $100 billion in the fund, which should be enough to cover both SVB and Signature depositors, a Treasury official told reporters yesterday.
When the FDIC took over SVB on March 10, the bank had about $175 billion in customer deposits. Signature had $110 billion when regulators assumed control yesterday.
In addition, the Fed and Treasury created an emergency program called the Bank Term Funding Program aimed at safeguarding institutions affected by the market instability caused by SVB and Signature. This program will offer loans of up to one year to banks, saving associations, credit unions and other institutions. The loans will have to be backed by high-quality collateral like Treasury Bills, agency debt and mortgage-backed securities.
Regulators said depositors at SVB and Signature will get access to all their money starting today, but shareholders and unsecured creditors of the two banks will not be protected and will likely lose all their investments.
Despite the government’s claim, the Wall Street Journal’s editorial board said the rescue plan is a “a de facto bailout of the banking system” in an op-ed yesterday. Regulators argued otherwise, saying the banks’ equity and bond holders are being wiped out. “They took a risk as owners of the securities, they will take the losses,” a senior Treasury official told CNBC yesterday.
President Joe Biden praised the Treasury’s move. “I am pleased that they reached a prompt solution that protects American workers and small businesses, and keeps our financial system safe,” he said in a statement on March 12. “The solution also ensures that taxpayer dollars are not put at risk.”
