Why Silicon Valley Bank's customers were bailed out
- Regulators shut down Silicon Valley Bank on Friday and halted account withdrawals.
- Over the weekend, SVB customers worried if they'd get their money back on time.
On Sunday, the US Treasury, Federal Reserve, and Federal Deposit Insurance Corporation said in a joint statement that all depositors of SVB would be made whole on Monday. They also rolled out other measures to support the broader financial system.
SVB was not a giant bank — it ranked 16th in US by assets. So why did the government step up in such a big way? To answer this, let's start at the beginning.
Why did Silicon Valley Bank collapse?
When the tech boom turned into a bust last year, SVB's startup customers began withdrawing some of the money from their accounts. That pushed the bank into selling some of its bond holdings, crystallizing losses of almost $2 billion last week.
The bank tried to raise new capital, but its stock slumped on Thursday, the day those deals were supposed to happen. Meanwhile, venture capitalists and startup founders, many of them SVB clients, fomented a panic on Twitter about the strength of the financial institution.
This social media firestorm created a bank run where SVB customers raced against each other to pull money from the bank. More than $40 billion was withdrawn suddenly. By Friday morning, the FDIC shut SVB down and halted any more withdrawals.
Did the government bail out Silicon Valley Bank?
No. SVB was closed by regulators, and is now under the control of the FDIC. When a bank fails, this is the government agency that ensures depositors get access to their money. Shareholders will get wiped out, and management has been removed.
The FDIC insures bank deposits up to $250,000 per account. Any missing money is paid by the FDIC. But this cash doesn't come from taxpayers. Instead, the agency raises money from assessments on all US banks. This is how the SVB backstop is being funded.
If the FDIC runs out of money, it can tap the US Treasury Department, which would mean taxpayer involvement. But even in the 2008 and 2009 financial crisis, when hundreds of banks failed, the FDIC avoided doing that.
So there's been no taxpayer funded bailout of SVB. Other banks are essentially paying to clean up the mess, through those FDIC assessments.
However, there is a new Federal Reserve lending program that provides liquidity for banks under stress right now. Financial institutions can hand over bonds that they don't want to sell and the Fed lends them money in return. There's an interest rate on those loans, but it relieves the pressure to sell assets at firesale prices. That's a form of government support, and SVB rival First Republic has already tapped it, for example.
Why is the government bailing out SVB customers?
Only about 12% of SVB's customer deposits were insured by the FDIC. That's because SVB's customers were mostly startups, founders and VCs, who often have a lot more than $250,000 in their accounts.
All told, there was about $150 billion of uninsured deposits. On Friday, when SVB failed, it was unclear when this money would be returned to depositors, or even if all the money would ever be given back.
Why does it matter if this money was going to be locked up for a few weeks? Well, it would have meant that real businesses and real people missed paychecks, skipped mortgage and rent payments, and delayed a host of other bills. Thousands of everyday defaults with the potential to cause mayhem for other businesses and individuals who also need to be paid on time.
So, the FDIC, the Fed and the Treasury Department decided to go big and guarantee all SVB's deposits, even the roughly $150 billion that was supposed to be uninsured.
In most modern financial systems, the depositor (the person who puts their savings in a bank) is sacrosanct. Bank shareholders usually get vaporized when bad things happen, and debtholders often get crushed too. The government spelled this out when the SVB rescue was announced.
"Shareholders and certain unsecured debtholders will not be protected," the Sunday evening statement said. "Depositors will have access to all of their money starting Monday, March 13."
Will people get their money back from Silicon Valley Bank?
Maintaining this simple promise is the key to many other things in the economy working smoothly: When you put money in a bank, you can take it all out whenever you need it. Guaranteed.
Without that, bank runs happen. Everyone wants to pull their money because they are worried about everyone else pulling money and want to get ahead of it.
With the FDIC now in charge of SVB, depositors were getting access to their money on Monday. The panic and urge to withdraw money has dissipated.
In fact, SVB may be the safest bank in the US now. It may actually be riskier to take your money out of SVB and put it in another bank at the moment.
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