WASHINGTON (AP) — President Joe Biden is assuring Americans that their money in banks is secure despite the fact that two sizable banks that serve the tech sector failed following a bank run. Emergency measures are being taken by government organizations to support the financial system. Everything about it is uncannily reminiscent of the financial crisis that started when the housing bubble burst 15 years ago. Yet the initial pace this time around seems even faster. Over the last three days, the U.S. seized the two financial institutions after a bank run on Silicon Valley Bank, based in Santa Clara, California. It was the largest bank failure since Washington Mutual went under in 2008. Yet the initial pace this time around seems even faster. Over the last three days, the U.S. seized the two financial institutions after a bank run on Silicon Valley Bank, based in Santa Clara, California. It was the largest bank failure since Washington Mutual went under in 2008.
Questions : Will the steps the government unveiled over the weekend be sufficient?
The Federal Reserve's aggressive plan to raise interest rates to fight inflation compounded Silicon Valley Bank's problems, which were already severe due to a difficult period for technology companies in recent months. Treasuries and other bonds totaling billions of dollars were held by the bank, which is typical for most banks since they are regarded as secure investments. However, because they have lower interest rates than comparable bonds issued in the current environment of higher interest rates, the value of previously issued bonds has started to decline. Additionally, since bonds are long-term investments, banks are not required to record declining values until the bonds are sold, so that usually doesn't present a problem. Such bonds are not offered for a price. loss unless there is an emergency and the bank needs cash. The failure at Silicon Valley had an urgent situation over the past year, the majority of its clients were startups and other tech-focused businesses, which started withdrawing their deposits as they needed more money. As a result, the bank was forced to sell some of its bonds at a significant loss, and as word of this spread, more bonds were sold at a faster rate, effectively making Silicon Valley Bank insolvent.
Federal Reserve, U.S. S. All deposits at Silicon Valley Bank and the recently-seized Signature Bank in New York will be guaranteed by the Treasury Department and the Federal Deposit Insurance Corporation. Importantly, they consented to guarantee all deposits up to the maximum amount of $250,000 that can be insured. Many of the venture capitalists and startup tech clients in Silicon Valley had much more money in the bank than $250,000. Therefore, up to 90% of the deposits in Silicon Valley were not covered by insurance. Many businesses would have been unable to cover payroll, pay bills, and keep the lights on without the government's decision to backstop them all. The goal of the expanded guarantees is to avert bank runs — where customers rush to remove their money — by establishing the Fed’s commitment to protecting the deposits of businesses and individuals and calming nerves after a harrowing few days.
Late Sunday night, the Federal Reserve launched a sizable emergency lending program with the goal of restoring trust in the country's financial system. Banks will be able to borrow money directly from the Fed to cover any potential surge in customer withdrawals without being pressured into the kind of bond sales that would jeopardize their ability to maintain their financial stability. The collapse of Silicon Valley Bank was due to such fire sales. If everything goes according to plan, there may not be much money needed to lend through the emergency lending program. Rather, it will give the public confidence that the Fed will cover their deposits and that it is prepared to make large loans in order to do so. Except for their ability to offer security, banks are not restricted in how much they can borrow.
