US Protects All Deposits at Silicon Valley Bank with Emergency Measures
The Biden administration has announced that clients of Silicon Valley Bank will be able to withdraw their deposits entirely.
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The Biden administration has announced that clients of Silicon Valley Bank will be able to withdraw their deposits entirely. This is an unusual action government officials took to support billions of dollars in unsecured funds due to concerns that the bank’s failure could cause more widespread panic.
What Will Happen with the Deposits?
In order to prevent the spread of financial instability to other smaller regional banks, federal regulators have taken emergency measures due to the sudden collapse of the Silicon Valley Bank. The rescue plan in the US consists of using a reserve of bank-funded federal insurance money rather than taxpayer dollars. At the time of publishing, Silicon Valley Bank customers should already have access to all of their funds.
Following the closure of Signature Bank by New York regulators, federal officials will guarantee deposits at the bank. It marks the third US bank to fail within a week, with Silvergate, a significant lender in the cryptocurrency market, also deciding to wind down operations and repay depositors.
Federal officials state their actions will keep the US economy safe by strengthening public confidence in the banking system. In addition, they believe that this measure will help maintain the essential roles of banks in protecting deposits and providing credit access to households and businesses.
On the other hand, in the UK, the British Treasury and the Bank of England announced they had arranged the sale of Silicon Valley Bank UK to HSCB, which is Europe’s largest bank. With this, they are ensuring the safety of approximately $8.1 billion in deposits.
Before the announcement of the federal officials, depositors of Silicon Valley Bank were concerned as federal insurance only covers accounts up to $250,000, and more of the bank’s deposits surpasses that amount. The bank’s clients mainly consist of tech startups and firms linked to the venture capital industry. Besides the promise that all deposits would remain safe, President Biden stated that those responsible for the situation would face the consequences.
Are Stock and Bond Investors Protected?
Federal officials stated that the insurance funds would back up deposits, not taxpayers’ money. However, the senior Treasury emphasized that the bank investors, such as equity and bondholders, won’t be relieved from these steps. They took a risk as owners of those securities and will face losses.
However, the Federal Reserve announced they would take new measures to provide funding to smaller banks and avoid the potential risk of the Silicon Valley Bank’s collapse.
The Cause for Silicon Valley Bank Failure
Silicon Valley Bank’s collapse was fast, but so was the government’s response. The bank’s stock price dropped on Thursday (March 9), and on Friday, California banking regulators closed the bank, assigning the Federal Deposit Insurance Corporation over $175 billion in customer deposits.
After all, bank deposits are critical for a functioning economy. They offer safe storage of funds, convenient access to funds, facilitate financial transactions, enable depositors to earn interest, and build credit history. Apart from the direct effect, banks also have an indirect impact across various sectors, such as real estate, education, agriculture, and gambling.
For instance, online casinos can deposit their profits, leading to an increase in bank deposit accounts. The same can happen with players’ winnings. While there’s no direct relationship between these two industries, it’s evident that bank deposits play a crucial role in the system regardless of the industry and set the ground for further economic growth.
A typical example is when Silicon Valley Bank experienced increased deposits during the pandemic. The bank then invested part of the cash in long-term government securities, creating a stable source of income over time.
However, the value of those securities began to drop when the Federal Reserve raised the interest rates drastically to overcome inflation, accompanied by a contract for funding startups. As a result, tech companies were spending cash quickly, which caused startups to withdraw more and more money from the Silicon Valley Bank.
To establish some balance, the bank sold part of its bond holding at a significant loss of $1.8 billion, which led more customers to withdraw their funds. Prominent venture capitalists like Peter Thiel’s Founders Fund recommended that it would be best if customers withdrew their deposits from the bank, which ultimately caused its collapse.
Tech CEOs Seek Help
Venture capitalists expressed their concern on Twitter, stating that the lack of support for deposits could have terrible effects on tech startups and venture capital firms. In addition, more than 5,000 startup CEOs reached out to federal officials for help, as founders weren’t sure whether they’d be able to pay employees if their funds stayed in the Silicon Valley Bank.
The CEOs submitted a petition in which they requested support to save innovation in the American economy without asking for bail for the bank’s equity holders or management. According to the petition, the collapse of the Silicon Valley Bank has a potential for systematic contagion.