The Silicon Valley Bank failure caused worries and panic among its clients but United States President Joe Biden says that they shouldn’t be worried.
On Wednesday last week, Silicon Valley Bank reported a loss of $1.8 billion from the sale of investments and announced a capital raise.
Despite being financially sound prior to Thursday, a large number of investors and depositors withdrew $42 billion in deposits on that day, causing a run on the bank.
As a result, the bank had a negative cash balance of around $958 million and was unable to meet its obligations. Despite attempts to transfer collateral, the bank was unable to pay its debts and is now insolvent.
“Thanks to the quick action in my administration over the past few days, Americans can have confidence that the banking system is safe,” the president said in a press conference on Monday.
“Your deposits will be there when you need them. Small businesses across the country that deposit accounts at these banks can breathe easier knowing they’ll be able to pay their workers and pay their bills. And their hardworking employees can breathe easier as well.”
Biden added that the money will not be paid with taxpayer money.
SVB worked with startups and emerging growth companies
Silicon Valley Bank (SVB) is a commercial bank that provided a range of financial services and expertise to technology and life science companies, as well as venture capital and private equity firms. The bank was founded in 1983 in Santa Clara, California, and has since expanded its operations globally.
The bank has built a reputation for working with startups and emerging growth companies, providing them with access to capital and advice on how to scale their businesses.
Some companies that used the bank included Shopify, Etsy, Roku, Pinterest, Fitbit and thousands of lesser-known startups.
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When a bank fails, it is typically taken over by a regulatory agency, such as the Federal Deposit Insurance Corporation (FDIC) in the United States. The regulatory agency will then work to resolve the bank’s outstanding obligations, including paying off insured deposits and selling off assets.
Depositors are generally protected by deposit insurance, which guarantees that up to a certain amount of their deposits will be reimbursed. In the United States, the FDIC provides insurance coverage for up to $250,000 per depositor, per bank.
In some cases, the bank’s deposits and assets may be transferred to another bank, either through a merger or acquisition. This allows customers to continue to access their accounts and services without interruption.
If the bank is unable to pay off its obligations, it may be declared bankrupt and its assets will be liquidated to pay off its creditors. This can have significant impacts on the local economy, especially if the bank was a major lender to businesses and individuals in the area.
Creating a culture of government intervention doesn’t prevent future institutions from relying on it
Senator Tim Scott, the top Republican on the Senate Banking Committee, argued that creating a culture of government intervention does not prevent future institutions from relying on the government to rescue them after taking excessive risks. He stated that he intends to hold both the banks and regulators accountable.
President Biden, in his remarks, emphasized that investors in the failed banks would not be protected, and management would be replaced. He stated that these banks knowingly took a risk and when it failed, investors lost their money, which is how capitalism operates.
A senior Treasury official stated that these measures do not constitute a bailout since stock and bondholders in SVB would not be protected. Policymakers aim to avoid comparisons to the bailouts of large banks during the 2008 financial crisis.
President Biden stated that a full accounting of what happened and why is necessary so that those responsible can be held accountable.
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Spot gold price jumped by 2.2 per cent after the bank failure
According to some analysts, the announcement of financial losses by Silicon Valley Bank exacerbated the crisis that had already been triggered by the winding down of operations by Silvergate Capital, a bank closely associated with the crypto industry, in the past week.
They also argued that the way Silicon Valley Bank communicated its losses contributed to the panic that fueled the run.
Experts said a lot of investors started looking to the precious metal space as a safe haven against this volatility and this risk.
Spot gold jumped 2.2 per cent to $1,909.19 per ounce by the morning which was the highest since early February. U.S. gold futures gained 2.5 per cent to $1,914.40.
Similarly, other valuable metals followed the trend, as silver surged 6.2 per cent to $21.78 per ounce, platinum rose by 3.9 per cent to $996.26 and palladium soared 6.6 per cent to $1,469.47.
Natalia@mugglehead.com
