Treasury Secretary Janet Yellen said on Sunday, local time, that the federal government would not bail out Silicon Valley Bank, but is working to help depositors who are concerned about their money.
Key points:
- Janet Yellen in an interview provides few details on the government’s next steps, but says there will not be a bailout
- Ms Yellen says the acquisition of Silicon Valley Bank by another institution is an option, but no buyer has stepped forward
- Senator Mark Warner says the focus is on making sure there’s no contagion
The Federal Deposit Insurance Corporation insures deposits up to $US250,000 ($378,000), but many of the companies and wealthy people who used the bank — known for its relationships with technology startups and venture capital — had more than that amount in their account.
There are fears that some workers across the country will not receive their pay checks.
Ms Yellen — in an interview with CBS’s Face the Nation — provided few details on the government’s next steps.
However, she emphasised that the situation was much different from the financial crisis almost 15 years ago, which led to bank bailouts to protect the industry.
“We’re not going to do that again,” she said. “But we are concerned about depositors, and we’re focused on trying to meet their needs.”
With Wall Street rattled, Ms Yellen tried to reassure Americans that there would be no domino effect after the collapse of the Silicon Valley Bank.
“The American banking system is really safe and well capitalised,” she said. “It’s resilient.”
Second-biggest bank failure in US history
Silicon Valley Bank — based in Santa Clara, California — is the nation’s 16th-largest bank. It was the second-biggest bank failure in US history after the collapse of Washington Mutual in 2008.
The bank served mostly technology workers and venture capital-backed companies, including some of the industry’s best-known brands.
Silicon Valley Bank began its slide into insolvency when its customers, largely technology companies that needed cash as they struggled to get financing, started withdrawing their deposits.
The bank had to sell bonds at a loss to cover the withdrawals, leading to the largest failure of a US financial institution since the height of the financial crisis.
Ms Yellen described rising interest rates — which have been increased by the Federal Reserve to combat inflation — as the core problem for Silicon Valley Bank. Many of its assets, such as bonds or mortgage-backed securities, lost market value as rates climbed.
“The problems with the tech sector aren’t at the heart of the problems at this bank,” she said.
No buyers in acquisition of Silicon Valley Bank
Ms Yellen said she expected regulators to consider “a wide range of available options”, including the acquisition of Silicon Valley Bank by another institution. So far, however, no buyer has stepped forward.
Sheila Bair — who was the FDIC chair during the 2008 financial crisis, recalled that, with almost all the bank failures during that time, “we sold a failed bank to a healthy bank. And, usually, the healthy acquirer would also cover the uninsured because they wanted the franchise value of those large depositors so, optimally, that’s the best outcome”.
However, with Silicon Valley Bank, she told NBC’s Meet the Press, “this was a liquidity failure. It was a bank run, so they didn’t have time to prepare to market the bank. So they’re having to do that now, and playing catch-up”.
Regulators seized the bank’s assets on Friday. Deposits that are insured by the federal government are supposed to be available by Monday morning.
“I’ve been working all weekend with our banking regulators to design appropriate policies to address this situation,” Ms Yellen said. “I can’t really provide further details at this time.”
Republican House Speaker Kevin McCarthy, told Fox News Channel’s Sunday Morning Futures that he hoped the administration would announce the next steps as soon as Sunday.
“They do have the tools to handle the current situation. They do know the seriousness of this and they are working to try to come forward with some announcement before the markets open,” he said.
Mr McCarthy also expressed hope that Silicon Valley Bank would be purchased.
“I think that would be the best outcome to move forward and cool the markets and let people understand that we can move forward in the right manner,” he said.
Democratic Representative Ro Khanna, whose district includes the city where the bank has its headquarters, said it was imperative that the government guarantee all depositors and that they “have full access to their accounts Monday morning”.
“Time is ticking,” he told CBS.
Concerns after collapse
Senator Mark Warner, said in an interview with ABC News’s This Week that he was concerned that the bank’s collapse could prompt nervous people to transfer money from other regional banks to larger institutions.
“We don’t want further consolidation,” he said.
Mr Warner suggested there would be a “moral hazard” in reimbursing depositors in excess of the $250,000 limit and said an acquisition would be the best next step.
“I’m more optimistic this morning than I was yesterday afternoon at this time,” he said. “But, again, we will see how this plays out during the rest of the day.”
He added: “What we’ve got to focus on right now is how do we make sure there’s not contagion.”
President Joe Biden and Governor Gavin Newsom spoke about “efforts to address the situation” on Saturday, although the White House did not provide additional details on the next steps.
Mr Newsom said the goal was to “stabilise the situation as quickly as possible, to protect jobs, people’s livelihoods and the entire innovation ecosystem that has served as a tent pole for our economy”.
Some firms impacted, but Australia well-placed, Chalmers says
The Australian federal government has said it was aware of some onshore firms having been impacted by Silicon Valley Bank’s closure.
However, federal Treasurer Jim Chalmers said the federal government’s initial advice from regulators was that any fallout from the collapse of Silicon Valley Bank was unlikely to be significant for Australia’s financial system.
“We are closely monitoring the situation and potential impacts for Australia caused by the collapse of the Silicon Valley Bank in the US,” Mr Chalmers said in a statement.
“In seeking preliminary advice, we are aware that some Australian firms have been impacted and we’re working closely with our regulators as well as the tech sector to better understand the implications for the industry as the situation evolves.
“Australians should be reassured that our institutions are solid, our banking sector is well-capitalised, and we’re in a better position than most other nations to deal with the challenges we face in the global economy.”
AP/ABC