After one of the nation’s largest banks collapsed last month, federal regulators scrambled to prevent a widespread financial crisis. Silicon Valley Bank (SVB), which largely served tech startups and venture capitalists, triggered panic on March 9 when it announced significant losses. It had invested in U.S. Treasury bonds and mortgage-backed securities that lost value when the Fed began gradually increasing interest rates earlier this year. SVB decided to sell $21 billion of these assets, losing $1.8 billion and sparking a bank run as customers rushed to withdraw money.
A few days later, Signature Bank also failed. The Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve feared the bank run would spread and intervened with a new lending program to protect depositors. When the collapse began, 97% of SVB deposits were uninsured, as they exceeded the FDIC’s insurance limit. Finally, on May 1, regulators seized First Republic Bank after it announced poor quarterly earnings and plummeted in stock value; JPMorgan Chase now owns its assets.
Who Pays?
Under the new lending program, banks can take out loans under generous terms by pledging qualifying assets like Treasury bonds as collateral. These pledged assets are priced at their original value as opposed to their current market value. The government provided a total $300 billion in such emergency funding but emphasized that taxpayers will not bear any of the cost. The Biden administration contrasted the program with the 2008 financial crisis bank bailouts, which cost taxpayers hundreds of billions of dollars.
However, some analysts argue that the Fed’s program could indirectly impact taxpayers and smaller banks. For example, by offering banks large amounts of cash, the Fed risks infusing the economy with too much money at once and causing inflation. Community banks and smaller lenders are also concerned that they will have to cover some of the costs of the lending program, and lower trust in all banks have caused some of their customers to withdraw money.
Capitalism, Crisis, & Controversy
Debate around the banking crisis has often focused on whether the government was justified in its intervention. Some argue that the move conflicts with “sensible capitalism” by protecting SVB’s customers from the consequences of their own mistakes. This lack of accountability could encourage other banks to engage in more risky behavior. Others have criticized the government for bailing out the nation’s wealthiest people and upholding a sense of Silicon Valley elitism.
Meanwhile, many experts have pointed out that the government’s action prevented what could have been an extensive and dangerous financial crisis. Even though banks received some federal support, they are now taking a second look at their balance sheets. Furthermore, the lending program only protects depositors; the government did allow the banks themselves to fail, wiping out shareholders.
What to Expect Next
The bank run is likely to have broader impacts throughout the U.S. economy, including slowing down long-term GDP growth. In the month since the crisis, there has also been evidence of slower employment growth and rising borrowing costs.
Michael Barr, the Fed’s vice chair for supervision, released a report on April 28 laying blame for SVB’s fate on the rollbacks of the Dodd-Frank Act in 2018, an overly cautious approach by Fed examiners, and mismanagement by SVB leadership. Barr concluded by calling for increased Fed supervision and regulation. Although Republicans were quick to criticize the call for more regulation, many experts, including JPMorgan CEO Jamie Dimon, expect banks to face tighter restrictions soon. Some smaller and midsize banks worry that greater restrictions could further complicate their operations.
The event also highlights the changing dynamics of banking in the digital era. Social media amplified and accelerated the panic; some have claimed that venture capitalists used their social media platforms to scare and manipulate the public into joining the bank run, putting more pressure on the government to intervene.
About two weeks after the crisis, the Fed went ahead with its planned 0.25% interest rate increase and announced another increase of 0.25% on May 3. Some commentators have described the event as a crisis of some banks but not the banking system itself. Still, other analysts have argued that the bank run exposes fundamental fragilities within the U.S. economy. If a gradual and foreplanned interest rate hike can cause such widespread distress, how secure is our financial system really?
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