(WatchDogReport.org) – When people and businesses deposit money into a bank, the cash doesn’t just sit in a safe in the back. The financial institution takes a lot of that money and invests it to bring in a profit and pay interest to the depositor. If everyone were to come to the bank simultaneously and demand their funds, it might take some time to call back the cash from the market to return it to the bank’s depositors.
Last week, Silicon Valley Bank (SVB) made an announcement that scared its clients, causing too many of them to withdraw their funds at the same time, collapsing the financial institution. To mitigate the damage and prevent a full-blown financial panic in banks all across America, the Biden Administration devised a plan and executed it in quick fashion.
What Exactly Happened?
When interest rates rise, stocks typically fall. That’s because it gets more expensive for businesses to run and typically means the company overall could be less profitable. SVB has been in the banking business for decades and has become the go-to bank for many startups and venture capitalists in the tech sector. NPR reported that many of those clients have been withdrawing more money than normal lately, so the financial institution announced it had to sell off part of its bond holdings at a hefty loss to cover the funds. That declaration scared other clients, who ran to withdraw their money as well — starting a panic.
The New York Post reported the bank tried to sell itself to cover the money, but it was unable to do so before the federal government swooped in, took over the bank, and handed the reins to the Federal Deposit Insurance Corporation (FDIC). The SVB panic quickly spread to Signature Bank in New York, which resulted in regulators shuttering that institution as well.
On March 12, the Federal Reserve announced it would cover all deposits for both banks — even those over $250,000, which are typically not covered by the FDIC. Treasury Secretary Janet Yellen consulted with the federal deposit agency and President Joe Biden to ensure they approved of the measure. The Fed stated the move will lower the stress on the US financial system, stabilize banking, and keep the impact on taxpayers, the economy as a whole, businesses, and households to a minimum.
Biden announced there would be “no losses” for taxpayers, as the money to shore up all insured and uninsured depositors will come from the Deposit Insurance Fund funded by the banks themselves. The president also said the heads of the banks would be fired, and the FDIC was now in control. Biden also assured the public they’re “deposits are safe.”
The administration will look into how the SVB incident happened in order to prevent similar problems in the future.
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