In just a matter of hours, two prominent banks in the U.S. had operations taken over by the FDIC.
On March 10, the Federal Deposit Insurance Corporation (FDIC) announced that it had taken over operations at California-based Silicon Valley Bank. This came two days after the bank announced that it sold over $20 billion in securities and $2.25 billion in treasury stock, and borrowed $15 billion. The news caused bank customers to start a bank run, withdrawing over $40 billion soon after.
Then, on March 12, it was announced that Signature Bank out of New York was also getting taken over by the FDIC. Signature was heavily into cryptocurrency. The bank failures of SVB and Signature came after Silvergate Bank announced that it would be shutting down amid its cryptocurrency failings.
There is concern that these failures could lead to a domino effect, as many banks employed a similar strategy since the start of the COVID-19 pandemic. The strategy in question was to take advantage of tech sector growth as people were forced online instead of going to shuttered stores. With deposits made by tech businesses, banks purchased long-term bonds and borrowed freely, because there was a glut of tech money with people staying home, like with Zoom. Unfortunately, thanks to the Federal Reserve going hard on interest rate hikes, the value of the bonds dropped and the rate of borrowing increased, leading to the collapse of the banks.
To prevent a panic, President Biden spoke the morning of March 13 to explain what was happening.
“First, all customers who had deposits in these banks can rest assured they’ll be protected, and they’ll have access to their money as of today. That includes small businesses across the country that banked there and need to make payroll, pay their bills, and stay open for business.
“No losses will be – this is an important point – no losses will be borne by the taxpayers. Let me repeat that: No losses will be borne by the taxpayers. Instead, the money will come from the fees that banks pay into the Deposit Insurance Fund.
“Because of the that our regulators have already taken, every American should feel confident that their deposits will be there if and when they need them.
“Second, the management of these banks will be fired. If the bank is taken over by FDIC, the people running the bank should not work there anymore.
“Third, investors in the banks will not be protected. They knowingly took a risk and when the risk didn’t pay off, investors lose their money. That’s how capitalism works.
“And fourth, there are important questions of how these banks got into these circumstances in the first place. We must get the full accounting of what happened and why those responsible can be held accountable. In my administration, no one, in my view – no one is above the law.
“And finally, we must reduce the risks of this happening again. 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 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 that this kind of bank failure will happen again and to protect American jobs and small businesses.
“Look, the bottom line is this: Americans can rest assured that our banking system is safe. Your deposits are safe.”
Because shareholders in SVB were not protected, they have already begun proceedings for a class action lawsuit against the bank. Also, the federal government is looking into SVB for any illegal activity such as insider trading.
Meanwhile, stocks tumbled after reports that Europe-based Credit Suisse has encountered some “problems,” making investors fear that a contagion of banking failures is imminent. The Saudi National Bank, which owns nearly a 10% stake in Credit Suisse, has said it would not provide any bail out.
