Silicon Valley: Can the chaos caused by the fall of the Silicon Valley bank be contained?

Will Washington be able to come to the aid of failed investors? Bank of Silicon Valley? Is it even politically possible?

It was one of the growing questions in Washington on Sunday as politicians tried to figure out whether the US government and its taxpayers should bail out a failed bank that basically served Silicon Valley with all its wealth and power.

Prominent Silicon Valley Politicians and leaders have been pushing the giant red “panic” button, saying that if Washington doesn’t come to the rescue of Silicon Valley bank depositors, another bank run is likely to occur this week.

“Either US deposits are safe or they are not. If not, check it out below,” Craft Ventures’ David Sacks, who is closely associated with billionaires Elon Musk and Peter Thiel, tweeted Sunday.

The Silicon Valley bank crashed on Friday as frightened depositors withdrew billions of dollars from the bank in a matter of hours, forcing US banking regulators to urgently shut down the bank in the middle of business hours to stem a bank run. This is the second largest bankruptcy in history after the collapse of Washington Mutual at the height of the 2008 financial crisis.

The Silicon Valley Bank was a unique creation in the banking world. As the name suggests, the 16th largest bank in the country mainly caters to tech start-ups, venture capital firms and well-paid tech workers. Because of this, the vast majority of deposits at Silicon Valley Bank were in commercial accounts with balances well in excess of the $250,000 insured limit.

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Its failure has resulted in more than $150 billion in deposits now locked up in receivership, meaning startups and other businesses won’t be able to get their money out for a long time. Employees of the Federal Deposit Insurance Corporation, an agency that insures bank deposits of less than $250,000, worked all weekend looking for a potential buyer for the failed bank’s assets. There were several claimants to the assets, but as of Sunday morning, the dead body of the bank remained in the care of the US government.

Despite the panic in Silicon Valley, there is no sign that a bank failure could lead to a crisis like 2008. The country’s banking system is healthy, has more capital than at any time in its history, and has passed numerous stress tests that show that the system as a whole can withstand even a significant economic downturn.

In addition, the Silicon Valley bank failure appears to represent a unique situation where the bank’s management made bad business decisions by buying bonds just when the Federal Reserve was about to raise interest rates and the bank was exclusively open to one particular industry. which has seen a sharp decline in the past year.

Despite a potentially unique crash, the collapse of Silicon Valley Bank did not stop investors looking for other banks that may have a similar situation. Shares in First Republic Bank, which caters to wealthy and tech companies, fell nearly a third in two days. PacWest Bank, a California bank serving small and medium businesses, fell 38% on Friday.

Although this is a unique situation, it was clear that the failure of a bank of this size was a cause for concern. Treasury Secretary Janet Yelle, as well as the White House, “followed closely” developments; California governor spoke to President Biden; and bills have now been proposed in Congress to increase the FDIC’s insurance cap to temporarily protect depositors.

“I have been working all weekend with our banking regulators to develop appropriate policies to address this situation,” Yellen said Sunday on Face the Nation.

But Yellen made it clear in her interview that if Silicon Valley expects Washington to come to its rescue, then it is wrong. Asked if a rescue was planned, Yellen replied, “We’re not going to do it again.”

“But we are concerned about contributors and are focused on meeting their needs,” she added.

Sen. mark Warner, Virginia, said on ABC’s This Week that potential bailouts for uninsured Silicon Valley savers represent “moral hazard.” The term “moral hazard” was often used during the 2008 financial crisis to describe why Washington should not have bailed out Lehman Brothers.

A growing panic among tech industry insiders is that many businesses that have kept their operating cash in a Silicon Valley bank will be unable to pay salaries or pay office expenses in the coming days or weeks on those uninsured deposits that are not released. However, the FDIC said it plans to pay an unspecified “advance dividend” – that is, a portion of uninsured deposits – to savers this week, and said more advances will be paid as assets are sold.

The ideal situation is that the FDIC finds a single buyer for Silicon Valley Bank’s assets, or maybe two or three buyers. It is equally likely that the bank will be sold off piecemeal in the coming weeks.

Todd Philips, a consultant and former FDIC attorney, said he expects uninsured depositors to likely return 85% to 90% of their deposits if the sale of the bank’s assets goes through in due course. He said it was never the intention of Congress to protect business accounts with deposit insurance, as the theory was that businesses should do due diligence at banks when holding their cash.

Protecting bank accounts to include businesses would require an act of Congress, Phillips said. It is unclear if the banking industry will support higher insurance limits, as FDIC insurance is paid for by banks through grades, and higher limits would require higher ratings.

Phillips added that the best Washington can do is communicate that the banking system is generally safe and that uninsured depositors will get most of their money back.

“People in Washington must strongly oppose tweets coming from Silicon Valley. If people understand that they will get back 80% to 90% of your deposits, but it will take some time, it will do a lot to stop the panic,” he said.

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