Washington tries to avoid ‘contagion effect’ after Silicon Valley Bank collapse

Yellen says priority is to ensure that depositors can access their money

This Monday is going to be key. Following the collapse of Silicon Valley Bank (SVB) on Friday, the U.S. government and financial regulators are racing against the clock to find a solution that will allow depositors to get their money back and avoid a crisis of confidence that could spread to other more solid banks. According to Reuters, in the next few hours there could be an official announcement from President Joe Biden’s administration to support the bank’s deposits and prevent the effects of the bankruptcy from spreading.

Treasury Secretary Janet Yellen also wanted to send a message of reassurance on Sunday. Yellen has been working “all weekend” with regulators to “design appropriate policies to respond to the situation,” she said in an interview broadcast on CBS television. “We are concerned about the depositors and we are focused on trying to address their needs,” said the senior official, who also stressed that the administration wants to make sure that “the problems that exist in one bank do not create contagion in other banks that are solid”.

The Federal Deposit Insurance Corporation (FDIC), the regulatory agency that has taken over the bank, began an auction of the bank on Saturday, according to Bloomberg. Bids were scheduled to be accepted until Sunday afternoon and the winner may not be known until late in the day. According to sources cited by the agency, it may not yield results.

SVB recorded last Thursday the largest withdrawal of deposits from a bank in recent U.S. history. In ten hours, $42 billion (about 39.5 billion euros) disappeared from its books, or more than $1 million per second. Until now, the largest deposit flight from a bank had occurred in 2008, when Washington Mutual customers claimed nearly $16.7 billion in ten days. On Friday, the FDIC took control of the Californian financial institution.

The FDIC guarantees any bank deposit up to $250,000 (235,000 euros). But SVB’s clients were overwhelmingly companies – almost all in the technology sector, from Roku to the communications giant Discovery – which had much larger funds in custody at the bank and which depend on that money to meet their routine expenses, including their workers’ salaries. According to the financial institution, 96% of its deposits are not guaranteed.

As of December 31, 2022, the bank had $175 billion in deposits (164.5 billion euros), and assets valued at a total of $209 billion (196.5 billion euros).

Urgency for payrolls

The regulator had advanced on Friday that throughout this week the unsecured depositors would receive a proportional advance of their funds. The rest, presumably, would have to wait for the liquidation of the bank’s assets, a process that can be long and does not guarantee that creditors will be able to recover all their money.

Many of the companies affected are startups, the niche in which Silicon Valley Bank had specialized. Given that in the United States it is common for companies to pay their employees on a biweekly basis, these small companies face the real possibility of not being able to meet their salary obligations on Wednesday, the 15th.

Throughout this weekend, the heads of several of them have implored the authorities for help through social networks, given the precarious situation in which they could be left. “The real victims of the collapse of SVB are the depositories: startups with 10 to 100 workers, who can no longer pay salaries, will have to put their people on technical unemployment or lay them off on Monday,” said Garry Tan, CFO of Y Combinator, an incubator of such companies, on his Twitter account.

“SVB’s collapse may seem like a 1% problem that only impacts the tech elite. It doesn’t. It hurts small companies created by people who work hard and pay modest mortgages in the middle of the country. This impacts families who have to feed their kids,” wrote entrepreneur Lindsey Michaelides, founder of the startup Strongsuit, from Ohio on the same social network.

In her televised interview, Yellen stressed that the Biden Administration is not considering taking steps to save the bank similar to those Washington took after the outbreak of the global financial crisis in 2008. “During the financial crisis there were investors and owners of large systemic banks that received a bailout… the reforms that have been put in place mean that we are not going to do that again,” the Treasury secretary insisted.

The senior official emphasized her message of reassurance to rule out the possibility of contagion. “Americans need to be confident that the banking system is sound, that it can meet the credit needs of households and businesses, and that depositors need not worry that they will lose access to their money,” she said.