FDIC Bails Out all Depositors of Silicon Valley Bank

by Wall Street Rebel - Michael London | 03/13/2023 9:39 AM
FDIC Bails Out all Depositors of Silicon Valley Bank

The administration of President Joe Biden has taken the extraordinary step of assuring depositors of Silicon Valley Bank that they would have full access to their cash beginning on Monday.


On Sunday, federal authorities said that they were taking measures to assure that depositors of the now-defunct Silicon Valley Bank would have access to the whole of their money on Monday.

The troubles that the bank was having were deemed to be a systemic danger to the whole financial system by the Federal Reserve, the Treasury Department, and the Federal Deposit Insurance Corporation, respectively. This declaration provided the regulatory agencies with the authorization to take the unusual step of guaranteeing the deposits of the consumers.

The agencies said in a joint statement that "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."      

Late on Sunday, U.S. authorities seldom used regulatory power to limit the fallout from the failure of Silicon Valley Bank. This once-obscure lender catered to business clients, particularly computer industry startups.

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During the course of the last four decades, SVB has garnered a reputation for successfully catering to the requirements of the IT community. Despite this, SVB was unable to withstand the onslaught of a perfect storm that included rising interest rates, poor financial decisions, a bleak market for technology, and a bank run. In addition, regulators made it quite clear in their statement that taxpayers would not be responsible for any damages incurred due to the resolution of Silicon Valley Bank. This culminated in the bank's failure almost overnight.

It is the largest US bank failure since Washington Mutual in 2008, which had $307 billion in assets before it went bankrupt and had a total of $209 billion in assets by the end of 2022. The situation at SVB, on the other hand, is especially unsettling because the Federal Deposit Insurance Corporation (FDIC) did not cover approximately ninety percent of the deposits at the bank. This was the primary source of concern among customers.

There were a lot of cascading impacts with depositors who banked with SVB wheather they would obtain their money in time to pay staff this week.

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Late on Sunday night, the Federal Reserve made a second statement about an enormous emergency lending program. This program was introduced with the intention of preventing a wave of bank runs that would jeopardize the viability of the banking system as well as the economy as a whole. Fed officials described the initiative as being comparable to what central banks have done for decades, which is to lend freely to the banking sector in order to provide clients the confidence that they may access their accounts anytime it is necessary.

Instead of having to sell Treasuries and other assets in order to acquire the necessary funds, banks who need to raise cash to pay depositors will be able to borrow that money from the Fed thanks to the lending facility. This will eliminate the requirement for those banks to sell securities. In order to cover the costs of its clients' withdrawals, Silicon Valley Bank was compelled to sell off a portion of its Treasury holdings at a loss. The newly implemented plan by the Fed allows financial institutions to deposit such assets as collateral and borrow money from the emergency facility.

The Federal Reserve's emergency lending facility may result in losses, but the Treasury Department has put aside $25 billion to compensate for any losses. Fed officials, on the other hand, have said that they do not anticipate having to utilize any of that money since the assets that were placed as collateral have a very low chance of defaulting on their obligations.

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The Federal Deposit Insurance Corporation (FDIC) announced on Monday that it had transferred all deposits, both insured and uninsured, of the former Silicon Valley Bank to a newly created, full-service "bridge bank" operated by the FDIC. This action was taken to safeguard the financial well-being of the bank's depositors.

The fall of Washington Mutual Bank during the 2008 financial crisis was the second-largest bank failure in the history of the United States. After a run on the bank that was triggered by concerns about the bond portfolio of the parent SVB Financial Group and the need to raise capital, the regulator closed the bank and its 13 branches on Friday and placed them in receivership. This move comes after the regulator closed the bank and put it in receivership.

The Federal Deposit Insurance Corporation has stated that customers of the bridge bank, known as Silicon Valley Bank N.A., will have complete access to the funds they have deposited beginning on Monday morning, when the bank will open its doors and resume its regular operations, including online banking.

"Under the systemic risk exemption allowed yesterday, the transfer of all the deposits was successfully executed. The FDIC said in a statement that the organization would fully compensate all of the institution's depositors.

With the failure of Silicon Valley Bank, the Federal Reserve launched a new emergency lending program on Sunday to enhance the banking system's capacity. This news comes as a result of that announcement.

As a result of the Federal Reserve's dramatic increase in interest rates, the profile of many banks is quite similar to that of Silicon Valley Bank, with bonds that have significantly decreased in value.

The collapse of Silvergate Capital the previous week also led to the Fed program being implemented today. Regulatory authorities put the cryptocurrency-friendly Signature Bank out of business on Sunday.

After an agreement reached over the weekend with the Federal Reserve and JPMorgan Chase & Co., First Republic said that it had access to more than $70 billion in new liquidity. This assistance came as a result of a new agreement that was reached over the weekend. Even after the Federal Reserve's move, the shares of First Republic Bank dropped by over 69 percent, making it obvious that investors are concerned about other financial institutions.

Other early movers in the banking industry include PacWest Bank., which fell by forty percent, and Western Alliance Bancorp., which fell by thirty-three percent.

The share price of Credit Suisse reached a new all-time low in Europe, plummeting as much as 15%, as investors continued to dump their money into the shares of the Swiss banking behemoth in the wake of the financial crisis that occurred in the United States.


                       Regulators say Silicon Valley Bank customers will be made whole

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