On March 10, U.S. banking regulators closed the Silicon Valley Bank (SVB) after it suffered a rapid collapse.
Founded in 1983, SVB was the bank to the U.S. tech industry and was the bank for half of all U.S. venture finance backed start-ups. According to reports, SVB had deposits from over 2500 venture capital firms. SVB had assets of $209 billion, and deposits of $175 billion.
Simply, the SVB ran out of cash.
It had had a large cash supply on hand before the US Federal Reserve began hiking interest rates. At that time, interest rates were low, and SVB management decided to invest its cash in long term bonds.
When interest rates began to rise, the economy and access to venture funding started to slow. Many of the startups banking at SVB needed to draw much more cash to cover their expenses. SVB found itself in a situation where it had to sell some of the bonds to boost their cash reserves in light of increased client needs to access to their deposits to meet payrolls and pay other expenses owing to creditors and suppliers.
SVB could not meet the demand for cash since it was locked into bonds which due to rising interest rates had lost value. They now needed to raise funds to cover their losses.
In today’s volatile post-Covid financial world, with almost instant social media communications investors quickly lost confidence in SVB. Through on-line banking, clients immediately moved to transfer their deposits out, further depleting the bank’s cash reserves. Things moved too quickly and SVB had no chance to manage this run on depositors’ assets.
SVB was the 16th largest U.S. bank, and this is the worst banking collapse since the great recession of 2008.
The Federal Deposit Insurance Corporation (FDIC) insures deposits up to $250,000. However, depositors are asking what happens to the billions not covered by FDIC insurance.
As stated above, companies will not be able to meet payroll, millions will suffer, and the impact on the economy could be serious. U.S. banks have lost over $100 billion in stock market value since Friday, and European banks some $50 billion, according to Reuters.
Does the Biden administration face a major financial crisis?
According to the Wall Street Journal, Mr. Biden said that deposits in SVB were safe, and customers would have access to their money starting Monday and no losses would be borne by taxpayers. It is too early to tell but for most agree that these were the necessary steps to take.
How will all this play politically in the run-up to the 2024 elections?
Sen. Elizabeth Warren (D., Mass.) said the recent bank failures “are the direct result of leaders in Washington weakening the financial rules,” and she called for repealing the 2018 law and changing deposit insurance rules. “Never again should large companies with billions in unsecured deposits expect, or receive, free support from the government,” she wrote in a New York Times opinion article.
President Biden told NBC News that,"During the Obama-Biden administration, we put in place tough requirements on banks, like Silicon Valley Bank and Signature Bank, including the Dodd-Frank law to make sure that the crisis we saw in 2008 would not happen again. Unfortunately, the last administration rolled back some of these requirements. I’m going to ask Congress and the banking regulators to strengthen the rules for banks to make it less likely this kind of bank failure would happen again and to protect American jobs and small businesses."
How Republicans and Democrats deal with this crisis in the run up to the 2024 election will be telling.
It was President Trump who rolled back tough requirements on banks. It is the Republicans who have a double standard when it comes to government intervention. When it comes to helping the poor, they stand steadfastly against it. When it comes to tax breaks for the rich or bailing out companies in trouble, they are all for it.
Republicans will have to explain how their mantra of fewer government regulations actually works in favor of the taxpayer. That could cost them many votes at the political center – essential for a presidential election win.
Democrats should not gloat. They will have to show how government spending can achieve social goals without increasing the already high national debt or inflation.
There is a lesson for all in this affair: government has to regulate key sectors of the economy to a degree that avoids similar situations, but also has to regulate spending as well.
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