Image Source: Business Journals
After the Silicon Valley Bank (SVB) and Signature Bank failed, the US government quickly fixed the banking system on Sunday.
The government said that starting Monday, people and businesses with money in SVB would be able to get all their cash.
After pressure grew, regulators also shut down the New York-based Signature Bank.
Later on Monday, President Joe Biden will talk about the crazy weekend in the financial world.
In a statement, he said, “Those who caused this mess will be held fully accountable.”
SVB was a bank that specialized in giving loans to tech companies. On Friday, regulators shut it down and took all of its assets. It was the biggest US bank failure since the 2008 financial crisis.
The US Treasury, the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve said that depositors would be safe. In addition, it said that the move would not cost the taxpayer anything.
SVB was trying hard to come up with the money to make up for a loss caused by the sale of assets whose value dropped because interest rates went up.
“The US banking system remains strong and stable, thanks largely to reforms made after the financial crisis that gave the banking industry better protections,” the authorities said in a joint statement.
“These changes, along with what we’re doing today, show that we’re willing to do what it takes to keep depositors’ money safe.”
These steps also apply to Signature Bank of New York, which became regulated on Sunday and is the next most vulnerable bank after SVB.
As part of what they are doing to restore trust, regulators have also shown banks a new way to access emergency funds.
The Federal Reserve said it would help with its new Bank Term Funding Program, making it easier for banks to borrow money from it in times of trouble.
SVB was seen as an important lender for tech companies in their early stages. For example, it was the banking partner for almost half of the venture-backed US technology and healthcare companies that went public last year.
What happened at SVB?
SVB specialized in giving loans to new businesses, and last year it worked with almost half of the US venture-backed technology and healthcare companies that went public.
Higher interest rates made it difficult for its customers to raise funds through private fundraising or selling shares. This put pressure on the company. More clients pulled out their deposits in a trend that grew last week.
Friday, the bank failed in the US because it couldn’t get enough money to cover losses from the sale of assets, mostly US government bonds, that were hurt by higher interest rates.
One founder said he kept refreshing his online banking page over and over again in the hopes that it might work.
Another person said he was sure the government would help, but he also said he might have lost around 40% of the company’s cash overnight.
So, depositors have been happy about this statement. But this move will make some people look funny.
SVB mostly worked with Silicon Valley’s start-ups and venture capitalists considered the tech elite. And these Silicon Valley elites tend to be more than just a little bit libertarian: the standard view is that the government is too slow and too big.
Critics say that the fact that the government has stepped in to save the day is very ironic. Some people will wonder if influential tech bros are getting special treatment: capitalism when things go well and socialism when they don’t.
This won’t be paid for by taxpayers, which is why the statement is worded carefully. Mr. Biden will now have to defend the decision and reassure people in his party that guaranteeing depositors was the only way.
In another case, Canadian authorities temporarily took control of the assets of SVB’s branch in that country. However, the top bank regulator said it would try to get permanent control.
SVB began as a bank in California in 1983 and has grown quickly over the last ten years.
But it was put under pressure when higher interest rates made it harder for new businesses to raise funds through private fundraising or share sales.
In Silicon Valley, the effects of the collapse are still being felt as companies try to figure out how it will affect their finances.
Paul Ashworth, the chief North American economist at Capital Economics, said that the US government had “acted aggressively to stop a contagion from spreading.”
“Rationally, this should be sufficient enough to stop any contagion from spreading and bringing down more banks, which can happen in the twinkle of an eye in the digital age. But contagion has always been associated with irrational fear, so we want to stress that there is no specific guarantee this will work, “he added.
In the meantime, HSBC has bought SVB’s UK branch.
Read Also: How the Sillicon Valley Bank collapsed in 48 hours
The Treasury said that no taxpayer money was used in the deal, which was worked out with HSBC through the night so it could be done before trading started on Monday.
Customers and businesses who couldn’t get their money before can now do so as usual.
