The Biden administration announced Sunday night that all depositors at the failed Silicon Valley Bank would have access to all their money on Monday morning, approving an extraordinary intervention aimed at averting a crisis in the financial system.
Fed officials declined to provide a specific figure for the size of that new loan program, but made clear it would be large enough to cover trillions of dollars in potential requests.
The series of crisis maneuvers by federal authorities — announced just hours before the start of trading in Asia — reflected the fear that has rippled through the banking sector just a few days after the collapse of Silicon Valley Bank, which many financial experts thought initially was an isolated episode.
Silicon Valley Bank
The decision by Treasury to backstop all deposits at SVB and Signature — not just those up to $250,000 that are insured under federal law — rested on a judgment that it was necessary to avoid a wider “systemic” meltdown. The move will likely ignite a political firestorm over the decision to protect the assets of tech firms, venture capitalists, and other rich people in California.
“Today we are taking decisive actions to protect the U.S. economy by strengthening public confidence in our banking system,” a joint statement from the Treasury Department, the Fed and the Federal Deposit Insurance Corporation said. “This step will ensure that the U.S. banking system continues to perform its vital roles of protecting deposits and providing access to credit to households and businesses in a manner that promotes strong and sustainable economic growth.”
On a call with reporters on Sunday evening, a senior Treasury official defended the administration’s decision as necessary to stabilize the banking system and said that the move would protect companies and workers who could be harmed by the bank’s collapse — not the bank’s shareholders or executives. The official spoke on the condition of anonymity to describe internal deliberations.
The decision to protect all deposits was made following unanimous recommendations by the boards of the Federal Deposit Insurance Corporation and the Federal Reserve, the nation’s top banking regulators. President Biden was also consulted on the announcement.
“The American people and American businesses can have confidence that their bank deposits will be there when they need them,” the president said. “I am firmly committed to holding those responsible for this mess fully accountable and to continuing our efforts to strengthen oversight and regulation of larger banks so that we are not in this position again.”
The president said he planned to speak on the banking system Monday morning.
“I’m very relieved,” said Jacqueline Reses, chief executive of Lead Bank, a Kansas City, Mo.-based bank, and a former executive at payments company Square. The start-up companies that had their money at SVB are important for job growth and innovation, she said.
Treasury Secretary Janet L. Yellen said that taxpayers would bear none of the burden of protecting depositors. Their funds will be backstopped by a pool of money that is regularly paid into by U.S. banks, which now holds more than $100 billion.
The new Fed program will enable banks to pledge U.S. Treasuries and other safe government securities as collateral in return for loans of up to one year from the central bank.
The initiative is aimed at resolving one of the problems that led to SVB’s failure: unrealized losses on the bank’s government securities. As the Fed raised interest rates last year, the value of those securities fell.
Industry-wide, banks at the end of last year reported $620 billion in such paper losses, according to the FDIC.
Banks don’t actually lose money if they hold those treasuries until maturity. But if they must sell them to cover depositor withdrawals, the losses appear on their books.
The Fed’s loan terms are more generous than its traditional 90-day lending channel. The central bank will lend up to the security’s original value rather than its depressed market value, thus potentially allowing banks to delay recognizing their losses for up to one year.
The new program, and the Fed’s support for the SVB and Signature measures, represent classic central bank actions to prevent a panic, according to a Fed official, who briefed reporters on the condition of anonymity.
Claims that the decisions do not amount to a “bailout,” however, are likely to be challenged. While the fund going to the depositors is paid into by U.S. banks, it is ultimately backstopped by the Treasury Department — and therefore U.S. taxpayers.
Treasury’s Exchange Stabilization Fund also will provide $25 billion to backstop the Fed loan program, though officials said the central bank “does not anticipate that it will be necessary to draw on these backstop funds.”
“Now is not the time for U.S. taxpayers to bail out Silicon Valley Bank. If there is a bailout of Silicon Valley Bank, it must be 100 percent financed by Wall Street and large financial institutions. We cannot continue down the road of more socialism for the rich and rugged individualism for everyone else,” said Sen. Bernie Sanders (I-Vt.) in a statement.
Sunday’s actions marked the most expansive use of Federal Reserve authority since the early days of the pandemic, when the central bank established several programs to ensure that credit continued flowing to employers and consumers.
The announcement came after federal officials spent the weekend scrambling to avert a broader financial problem in the wake of SVB’s sudden demise.
The decision appeared to reflect failure by federal authorities to find another bank to buy the remnants of SVB. Most bank failures are resolved with an acquisition that enables depositors to avoid losing any money.
Policymakers came under pressure to act from prominent Silicon Valley figures, including some donors to political campaigns, as well as unheralded entrepreneurs.
Start-up founders and investors spent the weekend scrambling to make sure they would be able to make payroll and keep their doors open next week.
Jacob Eiting, CEO of start-up RevenueCat, tweeted at Ohio senators that his company was “struggling to find liquidity to make it through next week.”
“I didn’t make risky bets. I wasn’t doing anything illegal,” he wrote. “We just put our money in a bank account and now, our business is a precarious position for it.”
Hemant Teneja, CEO of venture capital firm General Catalyst, tweeted that his and several other VC firms were offering low-interest rate loans to help companies pay employees.
Brex, a San Francisco financial tech company, offered an emergency credit line to start-ups. As of Saturday, the company said it had received $1.5 billion in requests from nearly 1,000 companies.
Some prominent investors called on the federal government to protect depositors. David Sacks, a general partner at Craft Ventures, said on the All-In podcast that it was not big tech that was at risk, but smaller companies.
“This could have a very damaging effect on the start-up economy and the whole U.S. economy,” he said. “These are the future companies that will keep the U.S. competitive versus China and the rest of the world.”
In calls with federal banking regulators late Saturday and Sunday, Democrats said they were “praying for a buyer,” said Rep. Brad Sherman (D-Calif.), a member of the House Financial Services Committee. “Big buyer, small buyer, fat buyer, skinny buyer — we need a buyer,” he said. “If they have a bunch of buyers, I would argue you take the best offer,” he said, noting then they can “quibble about which offer to take.”
The decision to provide unusual assistance to SVB’s depositors is expected to draw opposition. As discussions continued through Sunday, some experts said that problems at the bank — and others like it — did not pose a threat to the U.S. financial system. That was ultimately the justification cited by Treasury for backstopping all deposits.
“I think it’s going to be hard to say that this is systemic in any way,” Sheila Bair, former head of the FDIC, said on NBC’s “Meet the Press.”
The bank’s collapse would cost its shareholders and could trigger economic problems for companies that kept large uninsured sums on deposit, said Anil Kashyap, a professor at the University of Chicago’s Booth School of Business. But that did not mean the broader financial system would be imperiled as it was during the 2008 crisis.
“This isn’t a systemic event. This is a midsize bank that was badly managed,” he said. “It may be a little messy. But that’s different than if you have somebody at the core of the financial system stop making payments to somebody else at the core of the system and then the core implodes.”
The U.S. banking system is highly concentrated, with the top five institutions holding almost $13 trillion in assets. Even if other banks that are comparable in size to SVB suffered depositor runs, the overall financial system would continue to function, he said.
As fears grew of a run on other small or regional banks, some members of Congress also reassured their constituents that their cash is safe. On Sunday, Sen. Joe Manchin III (D-W.Va.) said that the banking system is “stronger and sounder now than any time” since the financial crisis.
“I urge the American people to allow the protections already in place to insure individual deposits and the well-being of local and regional banks, particularly in rural communities like we have in West Virginia, to be fully realized before reacting out of fear and amplifying the problem,” he said.
Leigh Ann Caldwell, Rachel Lerman and Gerrit De Vynck contributed to this report.
An earlier version of this article misstated the name of a Kansas City, Mo.-based bank. It is Lead Bank, not Lead Capitol. The article has been corrected.