U.S. Treasury Secretary Janey Yellen has confirmed that the government will not bail out the Silicon Valley Bank. However, it will continue to assist customers who still have their money deposited in the collapsed bank.
Yellen explained that the situation with SVB differed from the financial crisis in 2008 when the federal government had to protect the finance industry via the Emergency Economic Stabilization Act. The bank bailouts cost the government $700 billion.
According to Yellen, the Treasury Department is working with banking authorities to "design appropriate policies" for the SVB case. However, she said she could not provide details about said policies.
"We're not going to do that again," Yellen said. "But we are concerned about depositors, and we're focused on trying to meet their needs."
Authorities seized SVB's assets last Friday and promised that federally insured deposits would be available by Monday morning. The Federal Deposit Insurance Corporation (FDIC), the authorized body in charge of the insolvency case, insures deposits up to $250,000. However, many of SVB's clients, mainly tech startups and venture capitalists, have more than that amount in their respective accounts.
Executives at companies that hold deposits at SVB have raised concerns about their ability to pay their employees. Authorities in Massachusetts, where two SVB branches are located, said they were working to support small businesses and workers to ensure they would not experience "significant disruptions."
Yvonne Hao, Secretary of Massachusetts Economic Development, noted that Massachusetts might be "uniquely" affected by SVB's collapse because of its strong tech, innovation and life sciences sectors and that the bank had a large client base in the state.
The Santa Clara-based SVB is the 16th largest bank in the U.S. Its closure was the second biggest bank failure in the country's history after Washington Mutual's collapse in 2008. Its descent into insolvency started when its customers withdrew a large amount of cash as they had trouble receiving financing.
Governor @GavinNewsom issues statement on Silicon Valley Bank. pic.twitter.com/ZiJgI3VtgN
— Office of the Governor of California (@CAgovernor) March 11, 2023
The lack of liquidity forced SVB to sell bonds at a discounted price, but the bank eventually failed after venture capitalists urged startup founders to withdraw their money. Last Thursday alone, the bank had to accommodate $42 billion in withdrawals.
Yellen explained that the Federal Reserve's policy to raise interest rates was a major contributor to SVB's failure. Many of the bank's assets, including bonds and mortgage-backed securities, lost market value due to the climbing rates.
Regulators need to consider various options to deal with the SVB situation, including the acquisition of the bank by another institution, said Yellen. As of now, no buyer has been named.
House Speaker Kevin McCarthy, Rep-California, emphasized the importance of quick action by the administration before the stock market opened on Monday. He agreed that SVB should be acquired by another firm.
"I think that would be the best outcome to move forward and cool the markets and let people understand that we can move forward in the right manner," McCarthy added.
To Boston’s innovators, entrepreneurs & residents affected by Silicon Valley Bank—we’re monitoring & in close touch with federal & state partners to advocate for our local community. To share your info & experiences so we can keep you updated: https://t.co/tNgyXCLf44
— Mayor Michelle Wu 吳弭 (@MayorWu) March 12, 2023
U.S. banking sector remains 'resilient'
Wall Street turned volatile after SVB news broke out that the shares of the bank's parent company, SVB Financial Group, plunged 60 percent. However, Yellen reassured the public that the contagion effect of SVB's closure would be minimal. According to the Treasury Secretary, the U.S. banking system is "really safe" and "resilient."
Sheila Bair, the FDIC chairwoman during the 2008 crisis, supported Yellen's statement about the resilience of the U.S. banking sector. Bair said SVB experienced a "liquidity failure," so its problem was the inability to market its firm for sale before collapsing. She added that SVB must catch up and market itself to other "healthy" banks.
Bair explained that if another firm acquired SVB, it would cover the uninsured deposits, meaning customers could get all their money back.