The US government assures that the banking system is sound

NEW YORK (AP) — Depositors withdrew their savings, investors sold bank stocks on a massive scale and the federal government rushed to reassure Americans on Monday about the soundness of the banking system, after two banks failed raised fears that other banking institutions could declare bankruptcy.

President Joe Biden has insisted the system is safe after the second and third largest bank failures in US history occurred in 48 hours. In response to the crisis, regulators ensured that all deposits at both banks were safe and created a program to throw other banks a lifeline to protect them from a bank run.

“Your deposits will be there when you need them,” Biden told the audience, trying to convey calm. He also noted that bank executives responsible for bankruptcies will be held accountable.

On the other hand, the Federal Reserve announced that it would review the way it supervised the Silicon Valley bank.

“We need to be humble and do a careful and thorough examination of how we oversee and regulate this business, and what we should learn from this experience,” said the central bank’s vice president in charge. of oversight, Michael Barr, who will lead this initiative.

Regulators closed the bank on Friday after depositors rushed to withdraw their funds all at once. The largest failure in US banking history was that of Washington Mutual in 2008. New York-based Signature Bank was seized by regulators late on Sunday, the third-largest failure of a financial institution in history the United States.

In both cases, the government agreed to cover deposits, even those above the federally insured limit of $250,000.

Despite the message from the White House, investors generally dumped bank stocks. First Republic Bank shares were down more than 60% even after the bank announced it would receive emergency funding from the Federal Reserve and additional funds from JPMorgan Chase.

Shares of KeyCorp and Comerica plunged nearly a third of their value. Shares of well-known franchises such as Charles Schwab, Fifth Third Bank, Truist and Huntington Bancshares all fell by double digits.

The selloff took place in part because the country woke up to a new banking system and investors had to figure out who the winners and who the losers were, according to banking experts.

There was no guarantee that the anxiety wouldn’t spread. Customers of other banks whose deposits exceeded the $250,000 limit still risked losing access to their money for some time.

Just because the government has backed deposits at Silicon Valley Bank and Signature Bank “doesn’t mean it’s going to cover these smaller banks,” said Chris Caulfield, senior partner at West Monroe.

Wesley Zheng, co-founder and CEO of Posh Robotics, which works on developing sustainable batteries, said he would transfer $4 million from Silicon Valley Bank to JPMorgan Chase.

“No more small banks. We have so many other things we’re working on that we don’t want to worry about the risk management of the banks we work with,” he said.

In addition, government measures suggest that it will support all deposits if it prevents damage to the wider economy.

“Now everything is covered. It is a fact. No matter how specialized or isolated your bank is, if there is a risk of contagion, regulators have made it clear that they are going to intervene,” said Norbert Michel, banking policy expert at the Cato Institute.

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Rugaber and Megerian reported from Washington. Sweet and Bussewitz reported from New York. Associated Press editors Hope Yen in Washington; Michelle Chapman in New York; Jennifer McDermott in Providence, Rhode Island; Geoff Mulvihill in Cherry Hill, NJ; and Danica Kirka in London contributed to this report.