NEW YORK (AP) — Can Washington come to the rescue of Silicon Valley’s failing bank depositors? Is it even politically possible?
That was one of the questions hanging over Washington on Sunday as politicians grappled with whether the US government — and its taxpayers — should bail out a failed bank that has largely served Silicon Valley, with all its wealth and power.
Silicon Valley executives and prominent figures have hit the giant red “PANIC” button, saying that unless Washington comes to the rescue of Silicon Valley bank depositors, more bank runs are likely.
“The government has approximately 48 hours to correct a soon-to-be irreversible mistake,” tweeted Bill Ackman, a prominent Wall Street investor. Ackman said he has no deposits with Silicon Valley Bank, but is invested in companies that do.
Other Silicon Valley personalities were even more bombastic.
“Monday, 100,000 Americans will stand at their local bank and ask for their money – most won’t get it,” Jason Calacanis tweeted. Calacanis, a tech investor, was close to Elon Musk, who recently took over the social network.
Silicon Valley Bank collapsed on Friday as panicked depositors withdrew billions of dollars from the bank within hours, forcing US banking regulators to shut down the bank in the middle of the business day to disrupt the bank’s operations. It is the second largest bank failure in history, after the collapse of Washington Mutual at the height of the 2008 financial crisis.
Silicon Valley Bank was a unique creature in the banking world. The 16th largest bank in the country mainly served tech startups, venture capital firms and high-paid tech workers, as the name suggests. Because of this, the vast majority of deposits at Silicon Valley Bank were in corporate accounts with balances significantly greater than the $250,000 insured limit.
Its bankruptcy meant that more than $150 billion in deposits are now stuck in receivership, meaning startups and other companies may not be able to access their money for a long time.
Staff at the Federal Deposit Insurance Corporation, the agency that insures bank deposits under $250,000, worked over the weekend to find a potential buyer for the failing bank’s assets. There were several bidders for the assets, but as of Sunday morning, the body of the bank remained in the custody of the US government.
Despite the panic in Silicon Valley, there are no signs that the bank failure could lead to a crisis like the one in 2008. The nation’s banking system is healthy, holds more capital than at any time in its history, and has several stress tests showing that the entire system could withstand even a substantial economic downturn.
Moreover, the failure of Silicon Valley Bank appears to be a unique situation where bank executives made bad business decisions by buying bonds just as the Federal Reserve was about to raise interest rates and the bank was exposed to a certain sector which has seen a sharp contraction in the past year.
Investors looked at banks in similar situations. Shares of First Republic Bank, a bank that serves wealthy technology companies, fell by nearly a third in two days. PacWest Bank, a California-based bank that caters to small and medium-sized businesses, fell 38% on Friday.
Although highly unusual, it was clear that a bank failure of this size was cause for concern. Treasury Secretary Janet Yellen, as well as the White House, “to closely monitor” developments; the governor of california has spoke with President Biden; and now bills have been proposed in Congress to raise the FDIC insurance limit to temporarily protect depositors.
“We worked all weekend with our banking regulators to come up with appropriate policies to address this situation,” Yellen told “Face the Nation” on Sunday.
But Yellen made it clear in her interview that if Silicon Valley expects Washington to come to its rescue, it is wrong. When asked if there was a backup, Yellen said, “We won’t do it again.”
“But we are concerned about depositors and our focus is on trying to meet their needs,” he added.
Sen. Mark Warner, D-Virginia, told ABC’s “This Week” that it would be a “moral hazard” to bail out Silicon Valley’s uninsured depositors. Moral hazard was a term often used during the 2008 financial crisis to explain why Washington should not have bailed out Lehman Brothers.
The growing narrative of panic among tech industry experts is that many companies that have stored their operating cash at Silicon Valley Bank will not be able to pay salaries or office fees in the coming days or weeks when the uninsured deposits are not released. However, the FDIC said it plans to pay an unspecified “anticipated dividend” — or a portion of uninsured deposits — to depositors this week and said more advances will be paid as assets are sold.
The ideal situation is for the FDIC to find just one buyer of Silicon Valley Bank’s assets, or perhaps two or three buyers. Just as likely, the bank will be sold piecemeal in the coming weeks. Insured depositors will have access to their funds on Monday, and all uninsured deposits will be available as the FDIC sells assets to make depositors whole.
Todd Phillips, a consultant and former FDIC attorney, said he expects uninsured depositors to receive perhaps 85 percent to 90 percent of their deposits if the sale of the bank’s assets is done in an orderly manner. He said it was never the intent of Congress to protect corporate accounts with deposit insurance — that the theory is that companies should do due diligence on banks when they deposit their money.
Protecting bank accounts to include corporations would require an act of Congress, Phillips said. It is unclear whether the banking sector would also support higher insurance limits, since FDIC insurance is paid for by banks through ratings, and higher limits would require higher ratings.
Philips added that the best thing Washington can do is communicate that the banking system is safe and that uninsured depositors will get most of their money back.
“People in Washington need to strongly counter the Twitter narrative coming out of Silicon Valley. If people realize that they will get 80% to 90% of your deposits, but it takes time, it will go a long way in stopping the panic,” he said.
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