Can the chaos from the fall of Silicon Valley Bank be contained?

Can Washington come to the rescue of failed Silicon Valley bank depositors? Is it even politically possible?

That was one of the growing questions in Washington on Sunday as policymakers tried to figure out whether the US government — and its taxpayers — should bail out a failed bank that largely served Silicon Valley, with all its wealth and its power.

Prominent Silicon Valley figures and executives have hit the giant red “panic” button, saying that if Washington doesn’t come to the rescue of Silicon Valley bank depositors, more banks are likely this week.

“U.S. deposits are either safe or they’re not. If not, look out below,” David Sacks of Craft Ventures, who is closely associated with billionaires Elon Musk and Peter Thiel, tweeted on Sunday.

Silicon Valley Bank failed on Friday as frightened depositors withdrew billions of dollars from the bank within hours, forcing US regulators to shut down the bank in an emergency in the middle of the business day to halt banking operations. 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 banking world. The 16th largest bank in the country largely catered to tech startups, venture capital firms and well-paid tech workers, as its name suggests. Because of this, the vast majority of deposits at Silicon Valley Bank were in business accounts with balances significantly above the insured limit of $250,000.

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

Staff at the Federal Deposit Insurance Corporation — the agency that insures bank deposits of less than $250,000 — worked through the weekend to find a potential buyer for the failed bank’s assets. There have been many bidders for assets, but as of Sunday morning, the bank’s corpse remained in the hands of the US government.

Despite the panic from Silicon Valley, there are no signs that the bank’s failure could lead to a crisis like 2008. The nation’s banking system is healthy, has more capital than it has ever had in its history, and has undergone multiple stress tests showing that the overall system could withstand even a major economic downturn.

Furthermore, it appears that the failure of Silicon Valley Bank appears to be a unique situation where the bank’s executives made poor business decisions by buying bonds just as the Federal Reserve was about to raise interest rates, and the bank was uniquely exposed to a particular industry that has experienced severe shrinkage over the past year.

Despite being a potentially unique collapse, Silicon Valley Bank’s collapse hasn’t stopped investors from looking for other banks that may be in similar situations. Shares of First Republic Bank, a bank that caters to the wealthy and tech companies, fell by nearly a third in two days. PacWest Bank, a California-based bank that serves small and medium-sized businesses, plunged 38% on Friday.

Although it was 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 “closely monitoring” developments. the governor of california spoke with president biden. And now bills have been proposed in Congress to increase the FDIC insurance limit to temporarily protect depositors.

“I’ve been working all weekend with our bank 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 waiting for Washington to bail it out, it’s wrong. Asked if there was a bailout plan, Yellen said: “We’re not going to do it again.”

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

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

The growing narrative of panic among tech industry insiders is that many businesses that store their operating cash at Silicon Valley Bank won’t be able to pay payroll or pay office expenses in the coming days or weeks when those uninsured deposits aren’t released. . But the FDIC said it plans to pay an unspecified “advance dividend” — meaning a portion of uninsured deposits — to depositors this week and said more advances will be paid as assets are sold.

The ideal situation is for the FDIC to find a single buyer of Silicon Valley Bank’s assets, or perhaps two or three buyers. It is equally likely that the bank will be sold piecemeal in the coming weeks.

Todd Phillips, a consultant and former attorney at the FDIC, said he expects uninsured depositors will likely get 85 percent to 90 percent of their deposits back if the sale of the bank’s assets goes through in an orderly fashion. He said it was never the intent of Congress to protect business accounts with deposit insurance — that the theory was that businesses should do their due diligence on banks when storing their cash.

Protecting bank accounts to include businesses would require an act of Congress, Phillips said. It is unclear whether the banking industry would support higher insurance limits as well, since FDIC insurance is paid for by banks through ratings and higher limits would require higher ratings.

Philips added that the best Washington can do is communicate that 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 they’re going to get 80% to 90% of your deposits back, but it’s going to take a while, it will do a lot to stop the panic,” he said.

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