Fed Admits Blame for Silicon Valley Bank Failure
Should the FDIC insure more than $250,000 per depositor per insured bank?
Updated April 28, 2023
- The Federal Reserve acknowledged its role in the collapse of Silicon Valley Bank. In a 114-page report, the Fed noted how its supervisors were slow to recognize the extent of the bank's problems, and their failure to address the issues contributed to the bank's downfall.
- The report said changes to bank regulation in 2019, which exempted all but the largest banks from strict scrutiny, also impacted its failure.
- Following the collapse, the Fed promised more vigorous oversight of banks, including strengthening its supervision and regulation practices.
Updated March 17, 2023
- Silicon Valley Bank's parent company filed for bankruptcy protection on Friday, specifically chapter 11 protection, commonly referred to as "reorganization" bankruptcy.
- While assets sold through bankruptcy typically go to creditors, investors in SVB Financial — which hold around $2.2. billion in cash and liquid securities, $3.3 billion of bond debt, and $3.7 billion of preferred stock — may need help to cover losses at the bank.
- Tension remains high as the bank failures stir economic fears. Yesterday, Treasury Secretary Janet Yellen spoke before Congress to assure the nation of the banking system's security. Yellen said:
"I can reassure the members of the committee that our banking system remains sound, and that Americans can feel confident that their deposits will be there when they need them. This week's actions demonstrate our resolute commitment to ensure that depositors' savings remain safe."
Updated March 15, 2023
- After the collapse of SVB, investors are growing worried about the stability of the global economy and banking system. While the U.S. took emergency measures to secure SVB and Signature Bank, stocks continue to tumble, sparking fear that the failure will have worldwide consequences.
- The Dow Jones Industrial Average, which tracks the stock prices of 30 of the biggest American companies, dropped more than 1.7% on Wednesday morning, and the S&P, which tracks 500 large publicly traded stocks, fell 1.5%.
- This downfall on Wall Street was in part caused by a steep drop in shares of Credit Suisse, the second-largest bank in Switzerland and an important player in the global economy. Credit Suisse is a global investment bank and lender, meaning its failure would have global consequences.
- The decline of Credit Suisse's share prices led to a sharp decrease in rival banks and the European markets. The bank's chairman Axel Lehmann said its balance sheet is strong and they have sufficient capital, but investors are not assured.
- In the U.S., large banks like J.P. Morgan Chase and Goldman Sachs are down more than 4.5%, and smaller regional banks are seeing sharp falls in stock prices.
What’s the story?
- Silicon Valley Bank (SVB) quickly collapsed late last week, marking one of the most significant and impactful banking failures since the 2008 financial crisis.
- SVB, one of America's largest banks, provided services to nearly half of the nation’s venture capital-backed technology and healthcare companies and was a top lender to the start-up community.
- The bank is now under the control of the U.S. Federal Deposit Insurance Corporation (FDIC) — an independent government agency that insures banks and financial institutions — after being unable to pay back customers who withdrew their deposits.
- The collapse has sent a shock wave through Big Tech, Wall Street, and Washington D.C. U.S. and international authorities are working to prevent a full-fledged financial crisis.
How did it happen?
- The collapse occurred because the bank received large deposits from start-ups and used the money to buy billions of long-term U.S. government bonds. While the investments promised steady returns when interest rates were low, the Federal Reserve significantly increased interest rates to combat inflation, which the bank did not prepare for.
- At the same time, start-ups had to put more money towards repaying debt as borrowing costs increased, meaning deposits were dwindling at SVB. As clients made large withdrawals, the bank was forced to sell its investments at a discount. Once the bank’s large depositors began making withdrawals — many of which were uninsured — SVB had to announce its losses, leading to even more companies taking out their money.
- By Thursday, the bank’s stock fell 60%, dragging other bank shares down with it. Once the FDIC announced it would take over the institution, it put around $175 billion in customer deposits under the federal government's control.
The aftermath
- There is now concern about customers not trusting the American banking institution. Shares across the sector dropped over the weekend, with some midsized lenders using more than half of the value. Smaller banks like Signature Bank and First Republic are hustling to reassure customers and shareholders of their stable footing.
- Government regulators are racing to contain the aftermath as well. Treasury Secretary Janet L. Yellen told the public that the American banking system was “safe and well capitalized.”
- On Sunday, federal officials said in a statement:
"Today we are taking decisive actions to protect the U.S. economy by strengthening public confidence in our banking system. This step will ensure that the U.S. banking system continues to perform its vital roles in protecting deposits and providing access to credit households and businesses in a manner that promotes strong and sustainable economic growth."
- While the FDIC only insures up to $250,000 per depositor per insured bank, U.S. officials guaranteed that all SVB customers would get their money back. At the end of 2022, the bank reported holding $151.5 billion in uninsured deposits. According to regulators, the U.S. will tap into a deep reserve of bank-funded federal insurance money to pay back all customers.
- President Biden spoke at the White House on Monday, assuring the public that his administration is taking action to contain the aftermath and that those responsible will be held accountable.
“Americans can rest assured that our banking system is safe. Your deposits are safe. Let me also assure you that we will not stop at this. We will do whatever is needed on top of all of this.”
Should the FDIC insure more than $250,000 per depositor per insured bank?
-Jamie Epstein
(Photo credit: iStock/Sundry Photography)
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What happened? Greed happened.
These large regional bank argued that they need not have the same regulatory oversight that the big national banks are required to have. They spent millions in lobbying efforts to get the 2018 rollback on regulatory oversight passed by the Republicans and the trump as well as a few of the Democrats.
These large regional banks no longer had to submit to stress tests to assure that they maintained adequate liquidity to prevent a bank run, They used this release to engage in speculative investments which dramatically increased their valuations from 2018 until today - in some cases by 300% or 400% by speculative investments.
Repealing the 2018 trumpulican legislation would put some of these protections back in place and that is the first thing that needs to be done.
Increasing the FDIC limit on protection for depositors is another step that can help. It would require that the FDIC to raise the insurance rates for banks who have depositors protected by the FDIC, so that depositors with more than $250K can be fully insured as well.
Further, the regulatory rules will have to change to address the recent banking changes that allow immediate access to depositors accounts which can greatly increase the rate and severity of a bank run due to any number of economic actions.
Banks need to be safe repositories of depositor assets and not investment enterprises willing to risk depoistor assets for the banks fainacial growth.
I appreciate that the FDIC actions were made to prevent a cascading loss in confidence of the banking industry generally, as this would have been much more consequential.
I also appreciate that Biden made it clear that investors in the failed banks are not being protected by these actions as they are the ones intentionally engaged in speculative investments which always have inherent risk.
Its not the responsibility of the US Government or tax payers to underwrite companies to take risks in their investments. Instead the regulations requiring sufficient cash on hand be available and not invested in financial instruments with interest rate risk need to be reinstated. The 2008 financial failure, and more recently Silicon Valley & Signature Bank (go to lender for Trump & Kushner families) failures are proof.
"A package of regulations put in place after the financial crisis (called Dodd-Frank) was not nearly as strict as the banking laws and regulations of the 1930s. It required that the banks submit to stress tests by the Fed and hold a certain minimum amount of cash on their balance sheets to protect against shocks, but it didn’t prohibit banks from gambling with their investors’ money. Why not? Because Wall Street lobbyists, backed with generous campaign donations from the Street, wouldn’t have it."
"Which brings us to Friday’s failure of the Silicon Valley Bank. You didn’t have to be a rocket scientist to know that when the Fed raised interest rates as much and as fast as it did, the financial cushions behind some banks that had invested in Treasury bonds would shrink. Why didn’t regulators move in?"
"Because even the thin protections of Dodd-Frank were rolled back by Donald Trump, who in 2018 signed a bill that reduced scrutiny over many regional banks and removed the requirement that banks with assets under $250bn submit to stress testing and reduced the amount of cash they had to keep on their balance sheets to protect against shock. This freed smaller banks – such as Silicon Valley Bank (and the Signature Bank) – to invest more of their deposits and make more money for their shareholders (and their CEOs, whose pay is linked to profits)."
https://www.businessinsider.com/signature-bank-ivanka-jared-kushner-michael-cohen-trump-org-2018-7?amp
https://amp.theguardian.com/commentisfree/2023/mar/13/svb-collapse-2008-financial-crisis
I would support increased limits due to inflation and how much $250,000 is worth these days, but I don't know that it should be unlimited.
I understand the risks posed by the failure of these SVB depositors to get their monies, but I don't think the FDIC can go around protecting all depositors at all banks going forward.
I would support increased limits for small businesses and individuals, up to a point, but the rest should be handled in bankruptcy court. Those of us who worked for small businesses that went broke and couldn't make payroll didn't have the FDIC come along and bail us out when our paychecks stopped coming.
As for saving SVB, I think the FDIC made the right call here and am glad the government didn't save the bank itself. They needed to learn their lesson and be a role model for when financial institutions do not practice safe investing.
typical...the profits belong to the banks, but when thier risks fail, its up to the tax payer to ''bail'' them out...who bails me out if I start a business and it fails? or if I can't afford a life saving medical procedure?
in the words of Bernie Sanders ''
In America today, if you're a wealthy vulture capitalist with over $250,000 in uninsured deposits at a loosely-regulated bank, the federal government will guarantee that your money is safe in a weekend.
If you’re a struggling working person with no health insurance and get cancer, you're on your own.
That’s what Martin Luther King Jr. would call "socialism for the rich and rugged individualism for the poor."
It outrages me to watch wealthy bankers and their lobbyists repeatedly endanger the American economy, fight common-sense efforts to regulate them, and then expect the government to bail them out when they create a crisis.
If bankers were smart & ethical they wouldn't be bankers
If your product costs less than 5% and you are earning a weighted gross margin of 20% or more and you still lose money then you have to be dumb
perhaps its time to create a 'repository' where you simply pay a fee for safekeeping and transfers - a 'warehouse'
We already have trading platforms to take any portion of funds to 'gamble' with! Why would I authorize a 'bank' to use my deposits for flying kites?
if you combine the two - as we have now it becomes a defacto 'ponzi' house and no taxpayer should have to bail them out!
We need to bring bac ban regulations like Dodd-Frank and the Glass–Steagall act, that protected customers of banks, instead of allowing banks to invest our money with no restraints.
All deposits should be fully federally insured, and all banks should be prohbitd from gambling with my money.
Consumers and workers over the Wall Street and the Banksters
Hold the bank's CEO's accountable,take back bonuses , stock they sold prior to failure.
Any congress member who held stock in this bank and sold prior should be held accountable as well.
I am Treasurer of a suburban library with an annual budget of $550k+ and reserves for capital improvement and operating expenses that exceed $200k. In order to meet my fiduciary responsibility, I am forced to deal with three banks to insure that no single bank’s deposits exceed the $250k insured deposits limit. Increasing the insurance to at least $500k would be helpful.
As Treasurer of a suburban library with an annual budget of
The banking in America needs to be torn down and taken out of the hands of politicians. Go back to the precious metals standard, get the politics out of lending, food processing, farming, go to flat tax and audit the hell out of every sitting and former politician that is still alive. Prosecute by taking that money and put some ethics into that decision like any insider trading and a mandatory - Loose everything and go to Gitmo for 10 years no matter your age.
Banking is collapsing because of overspending like drunken fools, supporting Ukraine like drunken fools and hating free enterprise like communists.
Basically, most of you are doing a s..t job at best.
Why should the law be changed for a bad managed liberal bank? The FDIC protects up to 250,000. If this bank investors invested higher amounts in individual accounts, that's their loss, not taxpayers.
Stop bailing out the big Banks.
If they fail, let them fall.
Government needs to stop the heavy intrusion on the public economy.
Government needs to stop picking winners and losers.
We're told to trust banks, and then banks get stupid. It's not the depositors' fault; banks have made themselves essential; we may not like them, but unless we live all-cash, we need them. We deserve protection.
The lack of ensuring regulations over banking practices is a good excuse as any for this mess. However, the blame is still on the shoulders of the banks "board of directors". The everyday customer should be reimbursed for the amount they had in their account and not a penny more. The person who has their name on the account can always find a much safer place to open a new account. Bad choices made by the bank executives are those same executives responsibility---not the government and definitely not my tax dollars.
yes its time to raise the amount to ensure
There should be some sort of optional insurance, you take a reduced interest rate if you want it, and the difference covers the insurance, not taxpayers.
This is an old limit it should go up to a more representative
They did for SVB and should not have done it. It was they were Woke and friends with the current administration. If "regular bank", probably would not do it and would give it the Palestine OH treatment as they are white Republicans. Like unequal justice!
It's a shame that our government had a huge part in allowing this to happen. O'bama did it once and apparently Biden learned how to swindle millions from the American people.
I am so sick and tired of these continual crisis brought on by this administration. We need to start holding them all accountable. Jail them all!
More money than that? Spread it around.
Just say NO! Ahead of the colaspe stocks were cashed in , bonuses given another case ocf tender loving GREED .
I answered “Yes” to increasing FDIC insurance. However, I would suggest raising it to no more than $500k. As the treasurer of a town library with an annual budget and reserves of less than $750k, this would allow our library to have all of its funds fully insured in the two banks we currently use, rather than having the funds currently in excess of the $250k that we keep in one bank uninsured or requiring that we go to a third bank and do a three way juggle to manage our funds.
I answered
Since both savings and IRA funds are in a lot of banks the fdic should ensure the banks don't loose any funds.