US govt reassure finanical world there’ll be no banking crisis after SVB collapse

The US government moved to reassure the financial world there is no new banking crisis on the horizon after telling customers of the failed Silicon Valley Bank (SVB) that their deposits will be guaranteed. The US government did insist, however, that there will be no taxpayer-funded bailout for the lender.

The announcement was made jointly by the US Treasury Department, the Federal Reserve, and the Federal Deposit Insurance Corporation yesterday, following the seizure of the bank’s assets on Friday after a mass withdrawal of funds by depositors.

The financial health of the Santa Clara-based bank had been under scrutiny after it announced plans to raise US$1.75 billion in capital, having lost money on the sale of bonds, reported Aljazeera.

In a joint statement, the three regulators said that all customers would be protected and able to access their funds following the bank’s collapse, adding that the action would ensure that the US banking system continued to perform its vital roles of protecting deposits and providing access to credit.

Regulators stopped short of announcing a full-scale bailout similar to those provided to banks during the 2007-08 financial crisis, stating that investors and senior management would suffer losses, and taxpayers would not be called on to prop up the institution.

US Treasury Secretary Janet Yellen confirmed this position in an interview with CBS. She said…

“Let me be clear that during the financial crisis, there were investors and owners of systemic large banks that were bailed out, and the reforms that have been put in place mean that we’re not going to do that again. But we are concerned about depositors and are focused on trying to meet their needs.”

US President Joe Biden pledged to hold those responsible for the “mess” accountable.

Authorities have been engaged in a frenzied search for a purchaser for the country’s 16th largest bank ever since its seizure. This event constitutes the second-largest banking collapse in US history, trailing only the 2008 demise of Washington Mutual. Regulators have also reported the failure and seizure of Signature Bank, a financial institution based in New York, representing the third-largest banking failure in US history.

Despite the announcement, questions regarding prospective buyers for the banks remain unresolved. Nonetheless, the financial markets experienced a surge in early Asian trading following the disclosure. While some observers have expressed concern that depositors might withdraw funds from other financial institutions, leading to a wider financial crisis if the government fails to protect them, economists have emphasized that the collapse of SVB differs significantly from the failure of Lehman Brothers, which sparked the 2007-08 financial crisis.

According to Campbell R. Harvey, a distinguished professor at Duke University’s Fuqua School of Business, SVB is not considered one of the most prominent banks, and its failure resulted from distinct factors compared to the institutions that collapsed during the 2007-08 financial crisis. He said…

“If you think about the global financial crisis, there were a number of banks that were at risk at the same time and we started to learn about them, and these were not small players — these were big players, and they were all highly correlated.

“This bank is different. It’s not in the top tier. Most people never heard about it, but it’s been focused on tech investors in Silicon Valley… so I don’t see the similarities with 2007 at all.”

Harvey said that while multiple banks were extremely over-leveraged in the run-up to the 2007-08 crisis, SVB had failed due to its overreliance on the tech sector, which has lost trillions of dollars in value over the last year.