How Washington came to rescue U.S. banks

After the sudden collapse of a Silicon Valley bank, Democratic Representative Maxine Waters of California began frantically working the phones to find out what was happening to the failed lender—and to its panicked depositors. what will happen.

Waters, a former chairman of the House Financial Services Committee, was skeptical that another bank would step in as a savior and buy the failing institution.

“Banks don’t just wake up and say: ‘Oh, another major bank has a problem and they’ve collapsed. Let’s take it over,'” he said.

So began a frenetic weekend of non-stop briefings with regulators, lawmakers, administration officials and President Joe Biden on how to handle the demise of the nation’s 16th-largest bank and the go-to financial institution for tech entrepreneurs. should be done At the heart of the problem were tens of billions of dollars — including money companies needed to cover payroll — sitting in Silicon Valley bank accounts that weren’t protected by federal deposit insurance that only goes up to $250,000.

“Race Against the Clock”

Something needs to be done, federal officials agreed, before Asian stock markets opened Sunday evening and other banks faced waves of panicked withdrawals Monday morning.

“We were racing against the clock,” said Bharat Ramamurthy, deputy director of the National Economic Council.

Waters was right to be skeptical about the sale closing on the fly. The bank’s size — $210 billion in assets — and complexity made it difficult to close a deal quickly.

Federal Deposit Insurance Corp. officials told Republican senators Monday that they received offers for the bank over the weekend but did not have time to close. He said he may put Silicon Valley Bank up for auction again, according to a person familiar with the conversation who asked not to be named to discuss the private call.

But another plan was coming together. On Sunday, Waters was on the phone with Federal Reserve Chair Jerome Powell, who explained to her how it would work. The Fed was creating a new emergency program that would allow it to lend directly to banks to cover withdrawals without having to sell assets to raise cash. The idea was to reassure depositors and prevent bank runs in other institutions.

As of Sunday night, the Treasury Department, the Fed and the FDIC said the federal government will protect all deposits — even those that exceed the FDIC’s $250,000 limit.

“It’s truly miraculous,” Waters said, “an example of what working together and what government can do with the right people.”

But the definition was not unanimous.

In a call Monday with FDIC and Treasury Department officials, Republican senators expressed concern that millionaire Silicon Valley depositors are being bailed out — and the cost of federal deposits to community banks in their home states. Can be transferred in case of high valuation for insurance. , according to a person familiar with the discussion.

Bond losses and bank runs

The trouble began last Wednesday when Silicon Valley Bank said it needed to raise $2.25 billion to shore up its finances after suffering big losses in its bond portfolio, priced from the Federal Reserve’s interest rate cut. It fell after the increase in interest. On Thursday, depositors rushed to withdraw their money. An old-fashioned bank run was on.

At a House Ways and Means Committee hearing Friday morning, Treasury Secretary Janet Yellen said her agency is “very carefully monitoring” developments related to the bank. “When banks face financial losses, it is and should be a cause for concern,” he told lawmakers.

Biden was briefed on the situation Friday morning, according to a White House official, who spoke on condition of anonymity to discuss the private conversation. Then he celebrated an unexpectedly strong February jobs report, met with the leader of the European Union and flew to Wilmington, Delaware, for his grandson’s 17th birthday.

His weekend will soon be spent with phone and video calls focused on averting a nationwide banking crisis. Regulators were so concerned, they didn’t even wait until the close of business on Friday – as usual – to close the bank. They locked the doors during working hours.

It was the second-largest bank failure in U.S. history and one of the most difficult: a staggering 94% of the Silicon Valley bank’s deposits — including large cash holdings by tech startups — were uninsured by the FDIC.

As administration officials and regulators worked over the weekend, Biden expressed concern about small businesses and their employees who rely on those accounts that are now at risk, the White House official said.

There were also fears that if Silicon Valley bank depositors lost money, others would lose confidence in the banking system and rush to withdraw money on Monday, triggering a crisis, the official said.

Massachusetts Democratic Representative Jack Auchenclose’s phone caught fire before the weekend. The Silicon Valley bank had eight branches and offices in its home state, and word of its failure was spreading quickly on social media.

“The panic in Massachusetts’ industry and non-profit sectors was intense within hours,” Auchenclos said. “My phone just started blowing up.”

Silicon Valley Bank won’t be the only bank to fail. By Sunday evening, federal officials announced that New York-based Signature Bank, a major lender to New York landlords, had also failed and was being seized.

The government’s plan to cover deposits over $250,000 ended up applying to Signature customers as well.

In a statement on Sunday, Biden said“The American people and American businesses can be confident that their bank deposits will be there when they need them.”

On Monday, Powell announced The Fed will review its oversight of the Silicon Valley bank to understand what went wrong. The review will be conducted by Michael Barr, the Fed’s vice chair in charge of bank supervision, and will be released on May 1.

Now Biden and lawmakers are calling for legislative changes to tighten financial rules on regional banks, perhaps reinstating parts of the Dodd-Frank law that tightened bank regulation after the 2008-2009 financial crisis. But it was withdrawn five years ago.

Waters said it may be time to increase the deposit insurance limit. “We can’t just say it’s an emergency and forget about it,” he said.