On Friday, March 10th, 2023, Silicon Valley Bank experienced the largest bank failure to occur since 2008. Many people have decided to pull their money from this bank and deposit it elsewhere in fear of the lack of security. Although, President Biden reassured in his public address today that customers will now be able to access their money again. It sounds like your typical happy ending, but let’s look into what all of this really means and everything you should know.
What is a bank failure?
A bank failure occurs when a financial institution is unable to meet its obligations to its customers or creditors. It is often referred to as a ‘collapse’ and is the result of insolvency, mismanagement or fraud. Bank failures can cause significant disruption to the financial system and can even lead to economic instability in some cases. When a bank fails, the government may step in to protect the depositors and creditors by providing them with funds to cover their losses. This process is known as a bailout, which is sometimes funded by taxpayers. In extreme cases, a bank failure can cause a significant drop in consumer confidence and even lead to a full-scale economic crisis.
Who has the Silicon Valley Bank failure affected?
The Silicon Valley Bank failure has affected a large amount of people, especially regular consumers and other banks. Investors or shareholders of Silicon Valley Bank have been affected as well, and according to President Biden, they will not be protected. “They knowingly took a risk and when the risk didn’t pay off, investors lose their money. That’s how capitalism works,” he says. Also, companies who deposited their money into this bank were affected. Some of these include:
Etsy: Since the company uses Silicon Valley Bank to facilitate disbursement, they have had to delay some payments to sellers. Etsy has since put out a statement explaining the importance of supporting their sellers and small businesses, and that they plan to pay them through their other payment partners in the meantime.
Roku: The streaming app has announced in a disclosure that they are unsure of how much of the cash they will be able to recover — Roku had 26% of its $1.9 billion deposited into Silicon Valley Bank.
What does this mean for taxpayers?
As we mentioned before, the bailout is when the government steps in to protect the depositors and creditors by providing them with funds to cover their losses. Sometimes, this ends up being funded by taxpayers, but not this time around. President Biden confirms that no losses will be suffered by taxpayers because the money will come from the fees that banks pay into deposit insurance fraud.
Are there any updates regarding Silicon Valley Bank?
Silicon Valley Bank reopened their main office and branches as of today, March 13th. The Federal Deposit Insurance Corporation (FDIC) says that all insured depositors will be able to access their insured deposits no later than this morning. Unfortunately, there are no updates for the 89% of the bank’s $175 billion in deposits that were uninsured as of the end of 2022. The FDIC’s hope is that they are able to find another bank that’s willing to merge with Silicon Valley Bank, but there’s no guarantee.
How will bank failure be prevented in the future?
After the financial crisis in 2008, there were rules put in place during the Obama Administration in order to prevent it from happening again. According to President Biden, the Trump Administration rolled some of these rules back. As a result, banking regulators plan to step up and take action. “I’m going to ask Congress and the banking regulators to strengthen the rules for banks, to make it less likely this kind of bank failure would happen again — and to protect American jobs and small businesses,” President Biden states.
Conclusion
The Silicon Valley Bank failure was an unexpected event that no one wants to have to deal with. Even though it was only temporary and the bank is operating normally again, people’s money were still placed in an undesirable situation. Hopefully, regulators and the FDIC can work together to ensure that money protection is no longer a concern for consumers who rely on the bank.