Good News: Fed Announces Protection for All SVB Deposits
Fed rescue plan brings a collective sigh of relief
US Government Steps in after Silicon Valley Bank Failure
The US Federal Reserve announced a plan Sunday evening to assure that depositors at Silicon Valley Bank will have access to their money as of Monday morning, an enormous development that is likely to prevent widespread chaos across the financial markets. The importance of this move cannot be understated.
Per its press release, the Fed will enable the FDIC to complete its resolution of Silicon Valley Bank “in a manner that fully protects all depositors, both insured and uninsured.” For uninsured depositors, this brings tremendous relief, as there has been tremendous uncertainty as to whether the Fed would backstop uninsured claims. Without a resolution, either in the form of a Fed guarantee or an acquisition of SVB’s assets by another Bank, uninsured deposits would’ve potentially been at-risk.
The FDIC is an independent branch of the government that was created during the Great Depression to restore the public's confidence in banks. However, FDIC insurance normally is capped at $250,000. Silicon Valley Bank’s uninsured deposits at the end of 2022 totaled a whopping $151 billion, according to SVB public filings. That’s a lot of cash potentially at risk.
Now, both uninsured and insured depositors of SVB can access their money starting tomorrow (March 13). This move comes amid growing fears of a broader panic over the health of the nation’s banking system. In the absence of clear next steps, many public investors, consumers, and companies were worried about the potential for similar bank runs at other financial institutions. As noted by the President himself, Americans can now have full confidence their bank deposits will be protected.
The American people and American businesses can have confidence that their bank deposits will be there when they need them. ~ President Biden (@POTUS), Sunday 3/12
Signature Bank Bites the Dust (but gets a lifeline)
In a separate announcement, US regulators on Sunday also shut down New York-based Signature Bank, a big leader in the crypto lending industry, in a bid to prevent the further spread of the banking crisis.
Thankfully, the Fed included Signature Bank in its press release about SVB, so all depositors of Signature will also be fully protected, both insured and uninsured. As the Fed accurately states, “these actions will reduce stress across the financial system” and most importantly save us from having to see more VCs panicking on Twitter.
When it comes to Silicon Valley Bank, there were really only a few choices the Fed could have made
Once Silicon Valley was placed into receivership on Friday by the FDIC, Federal Regulators were left with only a few viable options going forward.
4 Main Possibilities for the Fed:
A buyer acquires Silicon Valley Bank.
Fed guarantees (backstops) all deposits, hoping to secure buyer.
Fed backstops w/o having a buyer in place.
No Fed guarantee & no buyer. A financial crisis ensues.
As noted above, the Fed effectively chose option #3. The preferred option may have been to have another bank buy SVB (option #2), but those talks did not progress substantially enough over the weekend. As we inched closer to the opening of financial markets in Asia, a move to reassure the public was needed. Otherwise, with option #4, we likely would’ve seen a global panic of epic proportions, especially given how SVB effectively collapsed in less than 48 hours.
For now, we can all sleep well tonight. And we have Janet Yellen to thank.
