Can the chaos of the collapse of Silicon Valley Bank be contained?

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NEW YORK (AP) – Can Washington come to the rescue of depositors of the failed Silicon Valley bank? Is it even politically possible?

That was one of the rising questions in Washington Sunday as policymakers tried to figure out whether the US government – and its taxpayers – should bail out a failing bank that largely Served in Silicon ValleyWith all his wealth and power.

Prominent Silicon Valley figures and officials are pressing giant red “panic” buttons, saying more bank runs are likely this week if Washington doesn’t come to the rescue of Silicon Valley bank depositors.

“Either deposits are safe in the US or they are not. If not, see below,” David Sachs of Kraft Ventures, which is closely linked to billionaires Elon Musk and Peter Thiel, wrote on Twitter on Sunday.

Silicon Valley Bank failed on FridayHorrified depositors pulled billions of dollars out of the bank in a matter of hours, forcing US banking regulators to promptly close the bank in the middle of the workday to prevent the bank from running. It is the second largest bank failure in history, behind the collapse of Washington Mutual at the height of the 2008 financial crisis.

Silicon Valley Bank was a unique creature in the of banking. As its name suggests, the country’s 16th largest bank largely served technology startup companies, venture capital firms and well-paid technology workers. Because of this, the vast majority of deposits at Silicon Valley Bank were in business accounts, with insured amounts well in excess of the $250,000 limit.

Its failure has resulted in more than $150 billion in deposits now locked up in receivership, meaning and other businesses may not be able to access their money for a long time.

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Employees of the Federal Deposit Insurance Corporation – the agency that insures bank deposits under $250,000 – have worked through the weekend looking for a potential buyer of the failed bank’s assets. Bidding was done several times for the properties, but the bank’s corpse remained in the possession of the US government until Sunday morning.

Despite the horrors of Silicon Valley, there is no sign That bank failure could lead to a crisis like 2008. The country’s banking system is healthy, has more capital than it has in its history, and has gone through several stress tests that show the overall system can withstand a major economic downturn.

Furthermore, it appears that the Silicon Valley bank failure appears to be a unique situation where bank executives made poor business decisions by buying bonds because the was about to raise interest rates, and the bank alone had exposure to a particular industry. which saw a severe contraction in the last year.

Despite being a potentially unique collapse, the demise of a Silicon Valley bank hasn’t stopped investors from looking for other banks that may be in a similar situation. The stock of First Republic Bank, a bank serving the wealthy and technology companies, has fallen by nearly a third in two days. PacWest Bank, a California-based bank that caters to small to medium-sized businesses, fell 38% on Friday.

Despite being a unique situation, it was clear that a bank failure of this size was cause for concern. Treasury Secretary Janet Yelle, as well as the White House, are “watching” developments closely; the governor of california has spoke to President Biden, And bills have now been proposed in to temporarily increase the FDIC insurance limits to protect depositors.

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“I have been working throughout the weekend with our banking regulators to design appropriate policies to address this situation,” Yellen said on “Face the Nation” on Sunday.

But Yellen made it clear in her interview that if Silicon Valley is expecting Washington to come to its rescue, it is wrong. When asked whether a bailout was on the tableYellen said, “We’re not going to do that again.”

“But we are concerned about depositors, and we are focused on trying to meet their needs,” she said.

Sen. Mark Warner, D-Virginia, said on ABC’s “This Week” that potentially bailing out Silicon Valley’s uninsured depositors would be a “moral hazard.” Moral hazard was a term often used during the 2008 financial crisis, for which Washington should not have bailed out Lehman Brothers.

The story of growing panic among tech industry insiders is that many businesses, which have deposited their operating cash at a Silicon Valley bank, will be unable to make payroll or pay office expenses in the coming days or weeks. Not issued without deposit. However, the FDIC has said this week it plans to pay depositors an unspecified “advanced dividend” — ie a portion of uninsured deposits — and has said more upfront payments will be made as assets are sold.

Ideally, the FDIC finds a single buyer for the Silicon Valley bank’s assets, or perhaps two or three. It is also likely that the bank will be sold piecemeal in the coming weeks.

Todd Phillips, an FDIC advisor and former attorney, said he expects uninsured depositors to get back 85% to 90% of their deposits if the bank’s asset sales are conducted in an orderly manner. He said it was never the intent of to protect business accounts with deposit insurance — the principle being that businesses should exercise due diligence on banks when depositing their cash.

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Phillips said an act of would be needed to protect bank accounts for businesses that are included. It is unclear whether the banking industry will support even higher insurance limits, as FDIC insurance is paid for by banks through appraisals and a higher limit would require higher appraisals.

Phillips said the best thing Washington can do is make sure the overall banking system is safe and that uninsured depositors will get most of their money back.

“People in Washington need to forcefully counter the narrative on Twitter coming from Silicon Valley. If people realize that they will get 80% to 90% of your deposit back, but it will take some time, This will do a lot to prevent panic,” he said.