The U.S. government has interceded in the ongoing crisis caused by the collapse of Silicon Valley Bank on Friday by guaranteeing depositor funds and making them available to customers starting Monday, March 13.
The bailout isn’t officially a bailout, even if it clearly is in part, given the government’s intervention. Treasury Secretary Janet Yellen claimed on Sunday television that under no circumstances was the government planning on bailing out SVB until that’s exactly what it did for depositors several hours later.
As detailed in a joint media release from the Department of the Treasury, Federal Reserve and Federal Deposit Insurance Corporation, the bailout guarantees depositor funds, including those above the FDIC insurance threshold of $250,000. An estimated 97% of all SVB customers held deposits of over $250,000, including thousands of startups and tech companies.
The bailout (or not bailout) only very specifically extends to depositor funds, with SVB shareholders and debtholders not being protected. The joint statement also notes that “no losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer” and then details how any funds spent in the depositor bailout “will be recovered by a special assessment on banks, as required by law.” A special assessment, in this case, would suggest that the government is planning on imposing a levy – a tax by any other name, on other banks to cover the costs.
That the treasury had to do something following the collapse of SVB is not necessarily a given. Still, likewise, non-intervention also ran the risk of contagion and not just in the banking sector but the broader economy. The real fear is that SVB won’t be the first bank to fall.
The fear of contagion is not named in the joint release, but it’s clearly the main driver, as along with the SVB depositor bailout, the Federal Reserve has also made funds available to other banks. In their words, the Federal Reserve “will make available additional funding to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors.” The Fed doesn’t make money available unless there is a need for it, suggesting that other banks may also be in trouble.
“The U.S. banking system remains resilient and on a solid foundation, in large part due to reforms that were made after the financial crisis that ensured better safeguards for the banking industry,” the joint statement claims. “Those reforms combined with today’s actions demonstrate our commitment to take the necessary steps to ensure that depositors’ savings remain safe.”
How SVB got to this point will make for an interesting documentary on Netflix Inc. one day, complete with a colorful cast of characters. For example, several reports have suggested that it was Peter Thiel telling his clients to pull their funds from SVB that triggered the SVB bank run, although the issues around the bank were well publicized before that.
Ultimately there will be Congressional hearings, various government investigations and more, presuming the government’s intervention with SVB works and other banks don’t collapse in the meantime. Although it will unlikely be asked, the broader question is not so much of bank regulation alone but broader macroeconomic policies.
SVB’s collapse didn’t come during a time of high growth and low-interest rates but one of 40-year high inflation and rocketing interest rates. SVB’s management certainly does bare some responsibility – tying up money on low-interest government bonds while its head of risk assessment is alleged to have prioritized running Pride events, but the collapse of SVB does not exist in a bubble – it’s one domino of many.