NEW YORK (AP) – Can Washington bail out the depositors of a failed Silicon Valley Bank? Is it even possible to be political?
That’s one of the growing questions in Washington Sunday as policymakers try to figure out whether the U.S. government — and taxpayers — should bail out the failed banks that largely make up Silicon Valley, with all its wealth and power.
Prominent Silicon Valley personalities and executives have hit the giant red “PANIC” button, saying that if Washington doesn’t bail out Silicon Valley bank depositors, more banks will run.
“The government has about 48 hours to fix this irreversible mistake,” Bill Ackman, a prominent Wall Street investor, wrote on Twitter. Ackman said he has no deposits with Silicon Valley Bank but invests in companies that do.
Few other Silicon Valley personalities have been more bombastic.
“On Monday 100,000 Americans will be lined up at regional banks demanding money – most will never get it,” Jason Calacanis wrote on Twitter. Calacanis, a technology investor, is close to Elon Musk, who recently took over the social media network.
Silicon Valley Bank failed on Friday, as depositors were afraid to withdraw billions of dollars from the bank in a few hours, forcing the US banking regulator to urgently close the bank in the middle of the workday to stop the bank run. It was the second largest bank failure in history, after the collapse of Washington Mutual during the 2008 financial crisis.
Silicon Valley Bank is a unique creature in the world of banking. The nation’s 16th largest bank mostly serves tech startups, venture capital firms, and well-paid tech workers, as its name suggests. Because of this, most of the deposits in Silicon Valley Bank are in business accounts with balances significantly exceeding the limit of $250,000 insured.
The failure has resulted in more than $150 billion in deposits currently locked in receivership, meaning startups and other businesses may not be able to raise money for a long time.
Staff at the Federal Deposit Insurance Corporation – the agency that insures bank deposits under $250,000 – have been working over the weekend looking for potential buyers for failed bank assets. There were multiple bidders for the assets, but as of Sunday morning, the bank’s body remained in the custody of the US government.
Despite the panic from Silicon Valley, there are no signs that bank failures could lead to a crisis like 2008. The country’s banking system is healthy, has more capital than it has held in its history, and has undergone numerous stress tests that show the system as a whole can withstand a recession. significant economy.
Furthermore, the failure of Silicon Valley Bank appears to be a unique situation where the bank’s executives made a bad business decision by buying bonds when the Federal Reserve was about to raise interest rates, and the bank was only affected by the specific industry it owned. seen a severe contraction in the past year.
Investors have been looking for banks in similar situations. Shares of First Republic Bank, a bank that serves wealthy and technology companies, fell by nearly a third in two days. PacWest Bank, a California-based bank that caters to small to medium businesses, fell 38% on Friday.
Although unusual, it is clear that a bank failure of this size is cause for concern. Treasury Secretary Janet Yellen as well as the White House, have been “watching closely” the development; the governor of California has said to President Biden; and a bill has now been proposed in Congress to raise the FDIC insurance limit to temporarily protect depositors.
“I’ve been working all weekend with banking regulators to design appropriate policies to address this situation,” Yellen said on “Face the Nation” on Sunday.
But Yellen made it clear in her interview that Silicon Valley expected Washington to bail them out, so it was wrong. Asked if a bailout was on the table, Yellen said, “We’re not going to do it again.”
“But we are concerned about depositors, and we are focused on trying to meet their needs,” he 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 is a term often used during the 2008 financial crisis because Washington should not have bailed out Lehman Brothers.
A growing narrative of panic among tech industry insiders is that many businesses that keep operating cash at Silicon Valley Bank won’t be able to pay salaries or pay office expenses in the coming days or weeks if uninsured deposits aren’t released. However, the FDIC has said it plans to pay an unspecified “advance dividend” – ie a portion of uninsured deposits – to depositors this week and said further payments will be made as assets are sold.
An ideal situation would be for the FDIC to find a sole buyer of Silicon Valley Bank’s assets, or perhaps two or three buyers. It is just as likely that the bank will be sold off piecemeal over the coming weeks. Insured depositors will have access to the funds on Monday, and uninsured depositors will be available when the FDIC sells assets to make up all deposits.
Todd Phillips, a consultant and former attorney at the FDIC, said he expects uninsured depositors to get back 85% to 90% of their deposits if the sale of the bank’s assets goes through in an orderly manner. He said Congress had no intention of protecting business accounts with deposit insurance — that the theory was that businesses should do their due diligence on their banks when storing cash.
Protecting bank accounts to include businesses would require Congressional action, Phillips said. It is unclear whether the banking industry would support higher insurance limits, since FDIC insurance is paid for by banks through assessments and higher limits require higher assessments.
Philips added the best Washington can do is communicate that the banking system as a whole is safe and that uninsured depositors will get their money back.
“People in Washington must be strong against the narrative on Twitter that comes from Silicon Valley. If people know that they will return 80% to 90% of your deposit, but it will take some time, then it will create panic,” he said.