The cash that individuals and corporations deposit into a bank doesn’t merely remain secure in the back. The financial institution invests a large portion of the money in order to make money and provide the depositor interest. It could be difficult to call back the money from the market and return it to the bank’s depositors if everyone came to the bank at once to demand their money.
When Silicon Valley Bank (SVB) issued a warning to its customers last week, a lot of them withdrew their money instantly, causing the financial institution to collapse. The Biden Administration quickly came up with a plan and put it into action to lessen the harm and stop a full-blown financial panic in banks across America.
Stocks often drop as interest rates rise. This is due to the fact that as operating costs rise, the corporation as a whole may experience declining profits. SVB has been in the banking industry for many years and has established itself as a preferred bank for many tech startups and venture capital firms. According to NPR, a lot of those customers have been making larger withdrawals lately, so the financial institution revealed it had to sell off a significant portion of its bond assets at a loss to cover the money. Several clients were alarmed by that statement and rushed to withdraw cash as well, causing a frenzy.
The federal government reportedly intervened, took control of the bank, and turned the reins over to the Federal Deposit Insurance Corporation when the bank attempted to sell itself to cover the debt but was unable to do so (FDIC). Regulators also shut down New York’s Signature Bank as a result of the SVB panic spreading there.
The Federal Reserve declared on March 12 that it would cover all deposits for both banks, including those that exceeded $250,000, which are ordinarily not covered by the FDIC. President Joseph Biden and the federal deposit insurance corporation were engaged by Treasury Secretary Janet Yellen to secure their support for the proposal. According to the Fed, the action will reduce strain on the US financial system, stabilize banks, and have a minimal impact on taxpayers, the overall economy, businesses, and families.
While the money to support both insured and uninsured clients will come from the Deposit Insurance Fund provided by the banks themselves, Biden declared that there would be “no losses” for taxpayers. The president added that the FDIC now held power and that bank executives would be sacked. Nevertheless, Biden reassured the people that “deposits are safe.”
To avoid such issues in the future, the government will investigate how the SVB situation occurred.