For fear of other banks, the United States analyzes the creation of a fund to support more deposits after the fall of Silicon Valley Bank

Too big to fail? The premises of the first financial crisis of the 21st century, when the United States government decided to bail out the financial system so that the fall of Lehman Brothers did not turn into a systemic catastrophe, seem to be back.

Indeed, the US Federal Reserve and the Federal Deposit Insurance Corp are considering creating a fund that would allow regulators to prop up more deposits at struggling banks after the collapse of Silicon Valley Bank, Bloomberg News reported.

Regulators “have discussed the new special instrument in discussions with bank executives and hope such a move will reassure depositors and help contain any panic,” the report said, citing people familiar with the matter.

“The new instrument is part of the agency’s contingency plans when panic spreads over the health of banks focused on venture capital and start-up communities, the report adds,” quoted by Reuters.

In this regard, “the US Federal Reserve declined to comment on the report, while the FDIC did not immediately respond to a request for comment from Reuters.”

Yesterday US President Joe Biden spoke with California Governor Gavin Newsom about the SVB bankruptcy and efforts to deal with the situation.

“Silicon Valley Bank imploded after depositors, worried about the bank’s financial health, rushed to withdraw their deposits.”

“The two-day frenzy of deposit withdrawals shocked observers and stunned markets, wiping out more than $100 billion of the market value of US banks,” he said.

SVB is a crucial lender for start-ups and is the banking partner of nearly half of America’s healthcare and technology companies backed by venture capital which went public in 2022.

The reasons for the collapse

1) The demand for financing decreases. The cooling of the financing market is due to the inexorably rising borrowing costs by the Federal Reserve over the past year, as well as the high level inflation.

2) Fear of investment risk. Private equity investors are also more reluctant to write large checks for stock market crashespecially stocks of high-flying tech companies.

3) Lack of cash. SVB has seen its cash drained due to lower deposits from start-ups – start-ups – facing a shortage of venture capital funding.

4) Fears of the stock sell-off. The bank had to carry out a forced sale of securities worth 21,000 million dollars on Wednesday 8, which led to losses of 1,800 million dollars and led to a 60% drop in its shares on Wall Street.

5) “Cascade” effect on other banks. San Francisco-based First Republic fell 16.5% after hitting its lowest level since October 2020. First Republic and SVB were the biggest losers in the S&P 500 by percentage on Thursday, while the loss of JPMorgan weighed more than any other stock at 1.9%. S&P 500 fell. Major US banks were also affected, with JPMorgan and Bank of America falling more than 5% and 6% respectively.

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