NEW YORK (AP) \u2014 Can Washington come to the rescue of the depositors of failed Silicon Valley Bank? Is it even politically possible?<\/p>\n\n\n\n
That was one of the growing questions in Washington Sunday as policymakers tried to figure out whether the U.S. government \u2014 and its taxpayers \u2014 should bail out a failed bank that largely\u00a0served Silicon Valley, with all its wealth and power.<\/p>\n\n\n\n
Prominent Silicon Valley personalities and executives have been hitting the giant red \u201cpanic\u201d button, saying that if Washington does not come to the rescue of Silicon Valley bank\u2019s depositors, more bank runs are likely this week.<\/p>\n\n\n\n
\u201cEither deposits in the U.S. are safe or they\u2019re not. If not, look out below,\u201d David Sacks of Craft Ventures, who is closely tied to billionaires Elon Musk and Peter Thiel, wrote on Twitter on Sunday.<\/p>\n\n\n\n
Silicon Valley Bank failed on Friday, as fearful depositors withdrew billions of dollars from the bank in a matter of hours, forcing U.S. banking regulators to urgently close the bank in the middle of the workday to stop the bank run. It\u2019s the second-largest bank failure in history, behind the collapse of Washington Mutual at the height of the 2008 financial crisis.<\/p>\n\n\n\n
Silicon Valley Bank\u00a0was a unique creature in the banking world. The 16th-largest bank in the country largely served technology startup companies, venture capital firms, and well-paid technology workers, as its name implies. Because of this, the vast majority of the deposits at Silicon Valley Bank were in business accounts with balances significantly above the insured $250,000 limit.<\/p>\n\n\n\n
Its failure has caused more than $150 billion in deposits to be now locked up in receivership, which means startups and other businesses may not be able to get to their money for a long time.<\/p>\n\n\n\n
Staff at the Federal Deposit Insurance Corporation \u2014 the agency that insures bank deposits under $250,000 \u2014 have worked through the weekend looking for a potential buyer for the assets of the failed bank. There have been multiple bidders for assets, but as of Sunday morning, the bank\u2019s corpse remained in the custody of the U.S. government.<\/p>\n\n\n\n
Despite the panic from Silicon Valley,\u00a0there are no signs\u00a0that the bank\u2019s failure could lead to a 2008-like crisis. The nation\u2019s banking system is healthy, holds more capital than it has ever held in its history, and has undergone multiple stress tests that shows the overall system could withstand even a substantial economic recession.<\/p>\n\n\n\n
Further, it appears that Silicon Valley Bank\u2019s failure appears to be a unique situation where the bank\u2019s executives made poor business decisions by buying bonds just as the Federal Reserve was about to raise interest rates, and the bank was singularly exposed to one particular industry that has seen a severe contraction in the past year.<\/p>\n\n\n\n
Despite being a potentially unique collapse, Silicon Valley Bank\u2019s demise hasn\u2019t stopped investors for looking for other banks that might have similar situations. The stock of First Republic Bank, a bank that serves the wealthy and technology companies, is down nearly a third in two days. PacWest Bank, a California-based bank that caters to small to medium-sized businesses, plunged 38% on Friday.<\/p>\n\n\n\n
While being a unique situation, it was clear that a bank failure this size was causing worries. Treasury Secretary Janet Yelle,n as well as the White House, has been \u201cwatching closely\u201d the developments; the governor of California has\u00a0spoken to President Biden; and bills have now been proposed in Congress to up the FDIC insurance limit to temporarily protect depositors.<\/p>\n\n\n\n
\u201cI\u2019ve been working all weekend with our banking regulators to design appropriate policies to address this situation,\u201d Yellen said on \u201cFace the Nation\u201d on Sunday.<\/p>\n\n\n\n
But Yellen made it clear in her interview that if Silicon Valley is expecting Washington to come to its rescue, it is mistaken. Asked whether a\u00a0bailout was on the table, Yellen said, \u201cWe\u2019re not going to do that again.\u201d<\/p>\n\n\n\n
\u201cBut we are concerned about depositors, and we\u2019re focused on trying to meet their needs,\u201d she added.<\/p>\n\n\n\n
Sen. Mark Warner, D-Virginia, said on ABC\u2019s \u201cThis Week\u201d that it would be a \u201cmoral hazard\u201d to potentially bail out Silicon Valley\u2019s uninsured depositors. Moral hazard was a term used often during the 2008 financial crisis for why Washington shouldn\u2019t have bailed out Lehman Brothers.<\/p>\n\n\n\n
The growing panic narrative among tech industry insiders is many businesses who stored their operating cash at Silicon Valley Bank will be unable to make payroll or pay office expenses in the coming days or weeks of those uninsured deposits are not released. However, the FDIC has said it plans to pay an unspecified \u201cadvanced dividend\u201d \u2014 i.e. a portion of the uninsured deposits \u2014 to depositors this week and said more advances will be paid as assets are sold.<\/p>\n\n\n\n
The ideal situation is the FDIC finds a singular buyer of Silicon Valley Bank\u2019s assets, or maybe two or three buyers. It is just as likely that the bank will be sold off piecemeal over the coming weeks.<\/p>\n\n\n\n
Todd Phillips, a consultant and former attorney at the FDIC, said he expects that uninsured depositors will likely get back 85% to 90% of their deposits if the sale of the bank\u2019s assets is done in an orderly manner. He said it was never the intention of Congress to protect business accounts with deposit insurance \u2014 that the theory was businesses should be doing their due diligence on banks when storing their cash.<\/p>\n\n\n\n
Protecting bank accounts to include businesses would require an act of Congress, Phillips said. It\u2019s unclear whether the banking industry would support higher insurance limits as well, since FDIC insurance is paid for by the banks through assessments and higher limits would require higher assessments.<\/p>\n\n\n\n
Philips added the best thing Washington can do is communicate that the overall banking system is safe and that uninsured depositors will get most of their money back.<\/p>\n\n\n\n
\u201cFolks in Washington need to be forcefully countering the narrative on Twitter coming from Silicon Valley. If people realize they are going to get 80% to 90% of your deposits back, but it will take awhile, it will do a lot to stop a panic,\u201d he said.<\/p>\n\n\n\n
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