Treasury Secretary Janet Yellen announced on Sunday that the federal government would not bail out the now-collapsed Silicon Valley Bank (SVB). The second-largest bank failure in history prompted regulators to take over the bank on Friday.
During an interview Sunday with CBS News’ “Face the Nation,” Yellen spoke broadly about what the Federal Deposit Insurance Corporation could do to protect depositors’ money. But the former Federal Reserve chairman under Obama stressed that SVB’s situation was different from the 2008 financial crisis, which led to massive bailouts.
Yellen tried to reassure the public that the Treasury Department was working to contain a possible banking contagion.
Janet Yellen on whether the collapse of the SVB could lead to further bank failures and a spillover to the economy:
“We want to make sure that the problems that exist in one bank do not create contagion to others that are sound.” pic.twitter.com/Wxs4Ne8uHl
— Becker News (@NewsBecker) March 12, 2023
“We want to make sure that the problems that exist in one bank do not create contagion to others that are sound,” Yellen said.
On Sunday, a second bank collapse prompted an intervention by the FDIC: Signature Bank of New York. The bank is closed due to “systemic risk”.
The Treasury Department and the Federal Reserve Board issued a joint press release on Sunday regarding the closure of SVB and Signature Bank.
Nick Timiraos of the Wall Street Journal reported that “[a]All Silicon Valley Bank and Signature Bank depositors will be fully protected, shareholders and certain holders of unsecured debt will not be protected, and there is a new Fed 13(3) line announced with $25 billion of FSE to protect bank deposits
“After receiving a recommendation from the Boards of Directors of the FDIC and the Federal Reserve, and consulting with the Chairman, Secretary Yellen approved actions that allow the FDIC to complete its resolution of Silicon Valley Bank, Santa Clara, California , in a way that fully protects all depositors,” the statement said. “Depositors will have access to all their money starting Monday, March 13. The taxpayer will not bear any losses associated with the resolution of Silicon Valley Bank.”
“We are also announcing a similar systemic risk exception for Signature Bank, New York, New York, which was closed today by its state chartering authority,” the statement continued. “All the depositors of this institution will remain intact. As with the Silicon Valley Bank resolution, the taxpayer will not bear any loss.”
“Shareholders and certain holders of unsecured debt will not be protected,” the statement added. “The senior management has also been dismissed. Any loss from the Deposit Insurance Fund to support uninsured depositors will be recovered through a special assessment on banks as required by law.
“Finally, the Federal Reserve Board announced on Sunday that it will make additional funds available to depository institutions to help ensure that banks have the ability to meet the needs of all their depositors,” he continued.
On Sunday, Yellen added in her interview that the Treasury Department is working to help depositors who are worried about their money.
While the FDIC only insures deposits of up to $250,000 per account, analysts have said several companies and wealthy investors had far more than the insured amount tied to SVB. There have been concerns that workers at some tech companies and startups won’t see their paychecks now.
“Well, let me be clear that during the financial crisis, there were investors and owners of large systemic banks that were bailed out, and we’re certainly not looking to” bail out SVB, Yellen said Sunday in response to a question about a possible bailout from the bank “And the reforms that have been put in place mean that we will not do it again,” he added. “But we care about depositors and are focused on trying to meet their needs.”
Armand Domalewski in a Twitter thread tried to clear up some confusion about what bank failures mean for depositors.
“[P]People are getting really confused about this whole Silicon Valley Bank / FDIC issue, so here’s a thread: -Most accounts over $250,000 are BUSINESSES, not individuals. Although the FDIC is only required to pay up to $250,000, in practice they tend to arrange a sale…”
people are getting really confused about this whole Silicon Valley Bank/FDIC thing, so here’s a thread:
-Most accounts over $250,000 are BUSINESSES, not individuals
-While the FDIC is only required to pay up to $250,000, in practice, they usually arrange a sale…
— Armand Domalewski (@ArmandDoma) March 10, 2023
“It would be really bad if we let every account with more than $250,000 in deposits lose all their money – SVB had almost 40,000 customers, most of whom are businesses that employ people. You’re talking about laying off tens of thousands of people for their bank!” he added.
“Although the FDIC is legally required to cover up to $250,000, in practice the FDIC tries to find another bank to buy the failed bank and try to make all depositors whole. The insured depositors are paid first, then the unsecured and equity holders / lenders last,” he continued.
“The FDIC doesn’t usually invest a lot of dollars; Whatever the gap between deposits and liabilities is, it tends to be compensated by shareholders and lenders,” he added. “And all they do is compensate by charging the banks higher insurance premiums. The FDIC is not funded by taxpayers.”
“The tl;dr is that the FDIC is not likely to ‘bail out’ SVB’s deposit holders, it is likely to make the people who invested in or lent money to SVB eat their losses and, if necessary, invest money. , will pay for it by charging other banks higher premiums,” he said. “One final thought: Why would another bank be willing to buy a failed bank? Well, for one thing, they’ll be able to ‘buy’ it for free: SVB’s equity holders are being wiped out. For two, the banks they pay a lot of money to acquire customers, and that gives them a lot of customers!
Whatever the Biden administration does, let’s hope for America’s sake that it doesn’t get any worse. After the debacle of the response to the Covid pandemic, a proxy war in Europe and a worsening border crisis, an economic disaster is the last thing the nation needs right now.
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OPINION: This article contains comments that reflect the opinion of the author.